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All returns are risk driven

How much risk should you tolerate when taking significant investments?
By Francisco J. Colayco |
All returns are risk driven

One of the fundamental rules in investing is to focus on managing risks.  The reason for this lies in the need to weigh certainty versus uncertainty in any situation.  Investment risk is simply the possibility or chance of something going wrong, which then leads to a loss, partial or total.  A hidden (or perhaps, more correctly, a given) goal is always to avoid catastrophic loss, meaning, getting financially wiped out, or worse, loss of life.   

 

Managing risks takes on many forms depending on the type/s of risk an investment carries.  Performance risk, currency risk, interest rate risk, market risk, commodity risk, country risk, social and cultural risk, government-related risk, regulatory risks, people-related risk, technology or obsolescence risk, etc, etc, These are real obstacles to success.  The challenge is to recognize which ones apply to a particular investment and then take action to mitigate the same.  Mitigating risk may not guarantee achieving the expected returns, but, not addressing attendant risks is a sure guarantee of failure.

 

Mitigating Risks

 
Fortunately, the one true and effective tool to reduce risk is free.  It is available to all of us. It’s time. And it is our best ally to reduce risk and increase returns.  The longer the time we keep our money invested, the lower the risk.  The longer the investment period, the more powerful compounding works, the higher the return.  Time coupled with smart investing strategy further reduces risks and increases effective return, at times to exponential proportions.

 

“Do not put your eggs in one basket” is a rule we are told all the time.  Spread your risks, diversify, and allocate your investments in different asset classes.  These are all sound advice.  But if your investible fund is limited, can you really achieve true diversification?  Most likely, not.  If your plan is to directly invest in the stock market and build you own portfolio, you would more likely want to be invest in at least 10-20 issues.  This plan would require that you put up at least a million pesos to get started.  And you have to be prepared to keep this money invested for at least five years. It must therefore be with money you do not and will not need.  Never, never should you use borrowed money!

 

Avoiding Scams

 

all_returns_are_risk_driven_2.pngIn the past two weeks of our “Pera Mo, Palaguin Mo!” radio program (over DZXL 558AM, from 11am to noon), we have been talking about high-risk investment offerings.  Part of our mission in this program is to advise the general public of current investment opportunities as well as warn them on questionable offerings.  One of these is Emgoldex, a networking operation involving ‘mini gold bars.’  Our discussions started with SEC announcing on the front page of leading newspapers that Emgoldex is not duly registered and therefore illegal and most probably, a scam.  So many reactions came in via phone calls, in our website, Facebook, and even our video channel (https://www.youtube.com/watch?v=240A4kaxkvU).

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Some who claim they believed in the principles I have been teaching say they are now disappointed in me because they believe I didn’t know what I was talking about.  One even went to the extent of saying that I may have fallen into the crab mentality of putting down successful endeavors.  Obviously, they had invested in Emgoldex and did not want to be told that they made a mistake and that most likely their investment would not pay out, if not actually end up a loss.

 

I have done some research into this gold-by-the gram investment system as I was personally offered to endorse a similar operation in the recent past. I deferred, believing that it was a potential scam, if it still was not one. Buying physical gold is an accepted investment and buying by the gram is not new.  Generally, unit prices are much higher than the prevailing prices of gold. This is understandable as clearly retail or ‘tingi’ prices have to be higher than wholesale prices. The cost of the product packaging alone already drives the unit prices higher. There are actually quite a number of such companies in the U.S and Europe.  Buying and selling of rare gold coins is on subset of this industry. They are legitimate as a trading endeavor.  However, one cannot expect exponential returns overnight.  The ‘bet’ here is that over time, prices of gold will beat inflation by a mile! Again, the critical variable is Time. You cannot expect to substantially grow your investment here short term.  Certainly not in the magnitude of five times your money in a few months.

 

all_returns_are_risk_driven_3.pngIn the case of Emgoldex and other similar companies, networking has been adopted as the marketing and distribution system.  Creative incentive schemes based on binary system for rewards are being touted to provide investors extremely high yields.  A networking structure is being used to push this precious metal in ‘micro’ scale.  A lot of hype is created that attracts investors because of the promise of high returns with small amount of money.  The cost of joining is so affordable.  These are all red flags because the underlying asset (gold) cannot provide such returns on short term.  Because the product (though micro) is gold, people tend to assume that it is easily tradeable, i.e., that it is really a liquid investment as it is easy to sell.  Is it really?  The company that was introduced to me was giving a buy back guarantee.  The only issue was that the their buy back price was always lower than the buying price. There was also the added concern of the cost of logistics.  There are still many other concerns that for lack of space, I cannot take up in this article.

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Suffice it to say that in these types of offerings, the obvious questions that always have to be posed and adequately answered might be:  a) What product will the investor get when he joins the marketing network? Is the amount he is paying commensurate to the actual value of the product he is getting?  Or, is he just getting the promise of profit by recruiting new members as his downline? b) How is profit generated by the proposed method of doing business?  The business model must clearly define the method and source of the profit that is paid out to the investor.  c) Is there really good margin in the cost and selling price of the product?  Is this margin sufficient to fund the high return offered to the investor?  d) What is the distribution structure?  Is this direct uni-level selling?  multi-level?   e) What is the system base of the rewards program? Binary?  Is the method realistic and practical?  f) Who is the end buyer and user of the product? In networking, which is a sound marketing and distribution system (networking per se is not an investment), creative programs can mask the true source of cash payouts.  In the case of scams or pyramiding, the source of returns is really the cash flow generated from recruitment of new members. 

 

I cannot overemphasize the obligation to focus on the risks an investment carries with it.  Focus and manage the risks and you will almost certainly win and succeed.  Focus on the return and ignore the obvious risks can only lead to certain failure. 

 

Let me end by citing the following words of Donald Trump…

“ Sometimes, the best investments are the ones we didn’t make… 

 

About the columnist

Colayco_author_box.pngFrancisco J. Colayco is an entrepreneur, a venture developer and financial coach.  He is the Chairman of the Colayco Foundation for Education and the Author of the Bestsellers:  Wealth Within Your Reach (2004 Book of the Year for Business and Economics Awardee), Making Your Money Work (Nominated for 2005 Book of the Year for Business and Economics), and Pera Palaguin Workbook. Together with the Colayco Foundation team, he gives talks, seminars, and workshops all over the Philippines and even reaches out to OFW Communities all over the world. Learn more about his advocacy to Build One Wealthy Nation at  www.colaycofoundation.com or email info@colaycofoundation.com.  To practice the investment principles he has been advocating in his publications and talks through the past 10 years, follow the Kapatiran sa Kasaganaan Service and Multi-Purpose Cooperative (www.kskcoop.com), an organization that provides its members with legitimate business options for different investment amounts.  

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