By JOHN ELLIS
MOST people are saving for something. They’re thinking of putting away some money for a rainy day, for their children’s education, a comfortable retirement or a dream holiday.
Thinking about investing their hard earned cash is a daunting prospect.
On one hand you could increase your funds, but there is always a chance that bad decisions can lead to bad outcomes.
Once people invest they can overreact, because of fear or greed, in both falling and rising markets; selling low and buying in high and jeopardising their long term objectives.
Other times they are lured in by fund advertisements that feature recent high performing funds – as if the investor could somehow inherit those historical returns despite the small print insisting past performance is no guarantee of future returns.
But there is no need to shy away from investing, done correctly you can reap rewards and see significant returns.
So how do we avoid the pitfalls and keep our money safe?
One: Encourage restraint by having a formal, written investment policy or allocation guideline for your entire portfolio – this will cut down on impulsive decisions.
The investment policy statement helps you commit to a disciplined investment plan so that your decisions are less likely to be swayed by emotion.
Two: Establish your objectives (for example: retirement planning, education, a holiday) and your time frame – and stick to it.
Three: Establish your Risk Profile. Three key components comprise your true risk profile: Your willingness to take risk, sometimes called ‘risk attitude’ or ‘risk preference’. Your 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 served by simply looking at the past performance of particular funds. It is achieved through a rigorous selection process for funds. Your financial advisor can talk you through the various steps.
I recommend an investment approach where you invest across multiple asset classes.
This is where you spread your investment (diversify) in, for example, a cash fund, a property fund, a bond fund, an equity fund, commodity or an absolute return fund.
It 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 and which is repeatable.
Once you have invested your money across the selected funds you now have your portfolio, but this is really only the beginning.
In order to benefit you need to re-balance your portfolio back to your original amounts each 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 aims to deliver good outcomes.
But remember a good process does not guarantee success but stacks the odds in your favour and this is as much as you can hope for.