BY JOHN ELLIS, FINANCIAL ADVISOR
Most people are saving for something. They are putting aside some money for a rainy day, their children’s education, a comfortable retirement, or a dream holiday.
But thinking about investing that hard-earned cash can be a daunting prospect. On the one hand you could increase your money by wise investing but there is always a chance that a bad decision could lead to a bad outcome.
Once people invest they can overreact because of fear or greed during falling and rising markets by selling low and buying in high thereby jeopardising their long-term objectives.
Other times they can be lured in by fund advertisements that feature recent high performing outcomes – as if you could somehow inherit historical returns despite the small print insisting past performance is no guarantee of future returns and your investment can fall or rise depending on the vagaries of the stock markets.
However, there is no need to shy away from investing if done correctly. You can reap rewards and see significant returns. So how do you avoid the pitfalls and keep your money safe?
Restrain yourself by having a formal, written investment policy or allocation guideline for your entire investment which will cut down on impulsive decisions. The investment policy statement will help you to commit to a disciplined investment process making your decisions less likely to be swayed by emotion.
Then establish your objectives. What is your goal? For example: retirement planning, education, a holiday? Determine your time frame and once in place stick with it. Next, establish your risk profile. There are at least three components to consider when determining your true risk profile; willingness to take risk, sometimes called ‘risk attitude’ or ‘risk preference’, financial ability to take risk, or ‘risk capacity’ and your need to take risk.
Once you’ve decided what your objectives are and agreed on your level of risk, it is important to match your expectations with an appropriate investment strategy and management process. It is not achieved by simply looking at the past performance of funds but through a rigorous selection process which your financial advisor will outline.
One investment approach is investing across multiple asset classes, called diversification. This is where you spread your investment over, for example, a cash fund, a property fund, a bond fund, an equity fund, a commodity, or an absolute return fund. This method requires a thorough analysis of many factors not least looking for a fund(s) with a strong track record which has been achieved without excessive risk- taking by the fund managers and is repeatable. Once you have invested your money across the selected funds you now have your portfolio, but this is only the beginning.
To really benefit you need to re-balance your portfolio back to the original amount at least once a year. Taking stock of your assets once a year is the best way to avoid obsessing over short-term fund performance. By following a consistent process and focusing on the nature of compounding money the investment process should deliver good outcomes but remember a good process does not guarantee success but will stacks the odds in your favour and this is as much as you can hoped for.
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