The investor's three basic rules
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When you or your banker put together your investment portfolio, the three following parameters must be considered: - Degree of risk
- Investment horizon
- Diversification
- Degree of risk ("no pain, no gain")
The return on your investment always boils down to the risk you are willing to take. Risk-free investments (e.g. money market) yield a basic interest rate. To gain a higher return, you need to accept a certain level of risk.
 | Graph 1: return is tied to risk
A high rate of return without any risk involved is unrealistic. Likewise, a high risk with a poor financial yield is a bad investment. So the return on an investment is directly proportionate to the amount of risk taken. |
- Investment horizon
Stock market fluctuations are dangerous only on the short and medium term. For the past 70 years, the value of listed securities has been on the constant rise. Stock values have multiplied by 77 during this period. On the long term, you are sure to come out ahead. If your investment horizon is extremely short term (1-2 months), you run the risk of selling your shares in a market bottom. If your investment horizon is medium term (2-3 years) or long term, you considerably reduce the risks tied to market fluctuations. Most medium-term investments increase in value, despite short-term stock market fluctuations.  | Graph 2: return is tied to investment horizon
Let's say you bought securities at point A. If you sell them at short term, you run the risk of selling at a loss (point B - 2% loss). On the other hand, if you sell on the long term, you have a good chance of selling at a profit (point C - 15% profit). And this is even though point C lies below the average growth rate. |
- Diversification
When investing, you mustn't put all your eggs in one basket. By investing in different assets, you reduce the effect that a drop in value of one security will have on your overall investment. Investment funds allow you to diversify your investments even if the initial amount is minimal. Portfolio size permitting, you can diversify your investments by buying securities of companies that react differently to stock market fluctuations or by varying the types of assets in your portfolio (shares, bonds, liquidity).  | Graph 3: Diversify risks
The more risk you're willing to take, the greater proportion of shares there will be in your portfolio. Bonds pay less than shares, but they also involve less risk. Similarly, liquidity is less profitable than bonds, but it involves even less risk. |
If you would rather have a professional manage your portfolio, your banker is available to take care of everything and give you a clear understanding of your investments.
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