Six key steps to avoiding perils of investing
AFTER the five-year hibernation, people are starting to take money out of deposit and invest it elsewhere – but it's important that they do so without getting burned.
One of the most common mistakes I see people make when taking the leap from deposits is switching into capital guaranteed tracker bonds.
Many are moving from deposits to escape the low interest rates and the penal 41 per cent tax on savings interest. However, a low interest rate environment is generally the worst time to invest in tracker bonds as more of the money in the investment will have to be used to provide the capital guarantee when the bond matures.
Also money invested in tracker bonds can be tied up for as long as six years – far too long, given that economic cycles are now much shorter in duration than they were in the past.
Another blunder that is often made by once-cautious savers is moving from one end of the risk spectrum to the other – and investing exclusively in high-risk assets. It is not wise to put all of your money into one type of investment, particularly for a conservative investor. You could lose a lot of your money if you do this.
If you have a wad of money on deposit and you're itching to put it somewhere where it will work harder for you, here are six steps that should keep you on the smooth investment track:
* Be careful who you take advice from. Contact a reliable independent financial adviser who will take time to understand your needs and then give you professional advice.
You need to provide an adviser with a full picture of your needs, your income requirements, your goals – and what degree of risk you will tolerate to achieve those goals. A professional financial adviser will explain the downside risk of any investment you are considering – as well as the potential return.
* Avoid dealing with tied financial institutions. Many of the banks are tied to (and therefore can only sell products of) particular insurance companies. As a result, they will not be able to offer you the choice you deserve – or in many cases, the best value.
* Don't be too conservative with your investments, particularly if planning for retirement. People often focus exclusively on not losing money and forget about the risk of outliving their money. They often don't consider risks such as inflation or the risk profile of particular investments.
* Avoid the temptation to follow the herd. Remember Warren Buffett's line: "What we've learned from history is that we don't learn from history". We often make the same investment mistakes over and over again.
* Diversify. Adding a selection of government and corporate bonds, high-yielding equities and commercial property to your portfolio can raise the amount of income you earn on your investments. A portfolio like this can easily be put together by using a selection of funds available from a number of the main providers in the market.
* A good financial plan loads the dice in your favour. Ensure that you have a financial plan and that it's written down. In my experience, investors who have a financial plan almost always do better than those who don't.
Paul Earley is managing director of financial planners Earley Consulting
Sunday Indo Business