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An essential wealth building strategy to lower your investment risk

by , 07 November 2014

If you've got some money in the bank and want to get it working harder for you, fear might be holding you back.

You know your money is safe where it is. If you decide to invest some of it, there's a chance you'll lose some of it, or worst case scenario, all of it.

So what sort of wealth building strategy can you follow that can help lower the risks you take on when you invest?

Read on to uncover what you can do…

Taking that first wealth building step

Investing in the stock market can be a good way of getting your money to work harder for you. If you’re trying to build your wealth, if you leave it in the bank you’re probably losing money.

Inflation is high and interest rates are low. Not a good combination. So what can you do?

You can opt for a risk reducing wealth building strategy.

Investing your cash can be a good option to get inflation-beating returns and build wealth over the long-term.

If you don’t want to invest in individual stocks, one option is unit trusts. With unit trusts, a fund manager does all the stock picking for you and pools your money with other investors.

By researching different unit trusts, you can find one with a risk level that suits you. You just need to read a fund’s fact sheet to find out more. You’ll find this on the unit trust provider’s website.

Instead of sticking a lump sum into a unit trust, you can opt to drip-feed it. This means that you’re not going to invest your cash just before a market crash and see a significant portion of it wiped out.

The ins and outs of rand cost averaging

This is known as rand cost averaging. And it works like this…

You invest a set amount once a month into one or more unit trusts. When prices are low, you’ll buy more units in a particular fund. And when prices are high, you’ll buy less units in a particular fund.

Your average unit cost will smooth out the differences between high and low unit prices over time.

Have a look at the table below, which shows you the effect of investing the same amount on a monthly basis…

Rand cost averaging calculations

If you plan to invest for the long-term, this strategy is particularly good as the longer you invest regularly, the more likely you are to buy units at a wide variety of prices.

This is a good wealth building strategy as you can invest safely when the markets are volatile and grow your money through compounding.

So there you have it. An essential wealth building strategy to lower your investment risk.

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An essential wealth building strategy to lower your investment risk
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