Question:
I have R300 000 in a money market with Stanlib and rely on this interest every month to survive. With the interest rate cuts this amount has been reduced significantly.

Is there anywhere else I can invest this money to give me an income of about R2500 a month without too much risk?

Answer:
Risk. A four letter word that strikes fear into the hearts of most investors at some point in time. Truth is, not much is done to truly understand the concept. For most, it is limited to the aspect of market risk at the expense of two other equally important risks: inflation risk and behavioural risk.

Market risk

This type of risk is the one most synonymous with the average investor’s vocabulary. What one is actually referring to here is volatility.

When considering the various asset classes in which to invest, there is a very apparent trade off between risk and return. A rule of thumb suggests that the higher the risk (volatility) the higher the potential return. With cash as the lowest risk, through to bonds, property and finally shares or equities, the return potential grows accordingly.

According to Investopedia, "Volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction."

Although this explains the uncertainty of markets and prices in the short term, there are some important long-term trends and guidelines that shed some light on the behaviour of various asset classes. In short, what this indicates is that over the short term, the potential of experiencing negative returns in growth assets (such as property and shares) is great. However, as time passes and one looks towards a five to 10 year time horizon, the risk of negative performance is virtually eradicated and often replaced with an attractive inflation-beating return.

Behavioural risk

When it comes to money, we as humans can often have an irrational relationship with it that often leads to poor decision making (always with the best of intentions).

Two of the most prevalent emotions are that of fear and greed (click here to learn more about the psychology of investing). The manifestation of these emotions may lead to one avoiding market risk (volatility) all together (fear) or even falling victim to the alluring returns of an 'opportunity of a lifetime' that ends up being nothing more than a ponzi scheme (greed).

These two emotions also wreak havoc in an investor’s portfolio as all too often fear causes disinvesting to take place when markets fall and greed dictates that the money will be 'better invested' in yesterday’s winner, which could be anything from an asset class (like cash), a particular fund or even a specific stock. History has shown us that more often that not, yesterday’s winner is tomorrow’s loser as markets and economies experience inevitable peaks, troughs and cycles.

This habit of buying high and selling low is a classic wealth destroyer and one that should be avoided at all costs.

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