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Risk and complexity in investments: Can you take the heat?

Every investor must decide how much risk they can stomach

When taking a risk, make sure you can handle it. Photo: Shutterstock

When taking a risk, make sure you can handle it. Photo: Shutterstock

This is part one in a series of four articles about investing.

In a recent conversation, I showed my annoyance at not having considered investing in some war-related investments back in November.  Mr Trump’s decision to bomb Syria and try to scare North Korea has pushed up the share value of companies producing weapons.

My hesitation was obviously due to not being comfortable in placing a month’s salary on the hope of Armageddon. Then again, I witnessed Inter win the Champions League and Leicester win the Premiership, so the end of the world can come.

Other than ethical constraints, the issue of how to best allocate one’s wealth is important. Even if you do not have any wealth, the management of credit (debt) is in a way wealth management. Sadly, there is no magical wand or perfect decision when it comes to investing. Instead, investors should ask themselves four key questions before taking a financial decision. 

The first question, and the focus of this article, is: How much risk can you handle?

A few days ago, the Venezuelan government paid interest on its bonds. Owning just one bond, I wasn’t overly happy or sad to receive the coupon payment. Guilt sunk in as Venezuelans are suffering hunger with no imports coming in, despite its government honouring its debt.

This guilt was compounded by the fact that it was still a great investment to make – the bond was purchased at a very low price and hence any income from it is profit.

This notwithstanding, buying Venezuelan bonds is not a recommendation I would have made, even in hindsight. The country has defaulted four times in their past 40 years and is heavily dependent on the price of oil. While even China made the error of lending the country significant funds, the intention may have been more to extend its sphere of influence rather than an expectation of profit.

This investment was a bet from my point of view. As a single 33-year-old male, a bet the size of a month’s salary is an affordable one. The same wouldn’t apply to a typical single earner household with dependents or a grandma. The latter would ‘feel the burn’ of losing a twelfth of yearly income and despite the longevity of today’s elderly, grandma may not have enough time left to win back any losses she made on such a bond.

In conclusion, an investment can be better suited for some than others. When taking a risk, make sure that you can handle it.

Dominic passed his PhD viva without any changes, yet his biggest accomplishment is making 100 edible ravioli from scratch. Both the PhD and the ravioli required a fair deal of dedication. You can tell him he is wrong at @domcortis

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