Get under the bonnet of investments
Published 06/07/2014 | 02:30
The world of investments is a complex arena - so it baffles me that people who specialise in areas like law, construction, medical or some other profession also feel they are experts in managing their investments.
It's true there is a lot of information available about investments and how to invest money. However, there are also a lot of YouTube videos on how to build a wall and I never come across fund managers building walls.
Time and time again, new clients come into my office with what they believe to be a good investment portfolio - when the opposite is often the case. Scarily, these portfolios have often been put together by somebody within my industry.
The world of investments is a minefield - but here are four golden rules which should keep you on the right track.
One - your underlying return will almost always come from the underlying assets class. The rest of the return comes from timing and management skill - so it is more than okay to ignore the timing and management and just chase the return.
Two - diversification is not just a pretty chart. Years like 2008 are unusual to say the least and that's because all asset classes dropped. The way markets are supposed to work is that one asset class goes down (such as equities) which results in another going up (such as gold). By being spread properly, you can smooth your return.
New customers sometimes come into me believing they have well diversified portfolios because they bought the same type of fund from two different providers. This is not diversification. In fact the level of crossover between stocks and shares in what may appear to be a well diversified portfolio can be frightening. It's important not just to look at the headline but to get under the bonnet and review what you are actually invested in.
Three - time is more important than timing. The longer you invest, the more you smooth out your average returns. Good luck if you try and time the market. It's important to decide on an investment plan and stick to it. It is often a knee jerk reaction to pull out of the market when it falls apart - that's a big mistake.
Large gains usually come after big falls. Ignoring taxes and charges, a US$1000 investment made in the S&P 500 on January 1st 1970 would have been worth $50,733 at the end of 2011 provided you just left it alone. But if you tried to time the market and missed just the best 25 single days, your pot would have been worth $12,071.
Four - have a strategy. Investing all of your money in one asset class or one investment style is not a strategy. With the success of some of the absolute return funds such as Standard Life's GARS fund, some people, including advisers, feel investing all of your money in them is acceptable. It is not.
Investing properly can offer big rewards but my advice to anyone planning on going it alone would be to diversify across geographic, sector and assets classes. Don't over analyse your gains and losses and strip out all emotion from the process. Find out what your risk tolerance is and more importantly, what your capacity for loss is and invest accordingly. Make a plan and stick to it.
Eoin McGee is principal of the Kildare financial advisers, Prosperous Financial Planning www.prosperous.ie
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