Smart money: Top ten tips for investing

0
Have your say

INVESTORS are often slotted into three categories: cautious, balanced and adventurous. But these narrow definitions fail to account for individual goals and aspirations. Barry O’Neill, investment director at Carbon Financial Partners, shares his top tips on working out what type of investor you are – and maximising your chances of success.

1 Start at the end

What do you want to achieve? Few people have taken the time to truly set out their goals and aspirations. We tend to think superficially about the long term and get distracted by the pressures of everyday life. In the immortal words of John Lennon: “Life is what happens to you while you’re busy making other plans.”

2 Think about inflation

Some of your goals and aspirations may not involve money at all. For those that do, having them clearly defined allows you to do your research to establish the cost of meeting them today. By factoring in inflation, the future value of the capital required can also be calculated. If inflation stays at 5 per cent, the real value of your capital would halve in just over 14 years’ time.

3 Cash-flow models

A good certified financial planner should be able to use cash-flow modelling that factors in the pertinent details of your income, expenditure, assets and liabilities, providing clarity and giving you confidence in your plan. This can also help you understand the potential financial implications of unforeseen events, like serious illness or death of your spouse or partner.

4 Minimise your risks

Take the least risk necessary to achieve your target return. This might sound obvious, but very few people have a grasp of the nature or level of risk they are taking.

Having an expert cast an analytical eye over your investments can be one of the most valuable services you’ll pay for. The investment industry has not helped matters by using ambiguous terms like “cautious managed” and “balanced managed” to describe funds that can, and regularly do, have equity holdings of up to 60 and 85 per cent respectively.

If you don’t need a double digit return each year, you don’t need to have most of your money invested in shares.

5 Stick to your plan

You should know now what sort of return you need to meet your goals. Don’t be talked into cutting corners.

Glossy brochures promising risk-free returns of 10 per cent a year, performance graphs showing investment returns heading in a nice smooth upwards line and guaranteed products backed by highly-rated counterparties are just some of the recent examples of too-good-to-be-true investments to have ended in disaster. If you don’t understand how returns are generated and can’t establish where the true risks lie, don’t invest.

6 Think like a true investor

One of the key differences between investing and speculating is the time involved. True investors allocate capital to markets for the long-term in the expectation that they will be compensated appropriately for the risks they take on; speculators think they can forecast the psychology of markets and can profit in the short-term.

Countless studies demonstrate the importance of “time in the market” rather than “timing the market”.

7 Cut out needless costs

You now have a plan and the correct mindset, so can now focus on cutting out wastage. Some costs are necessary; quality financial planning advice should prove to be invaluable in achieving your goals and aspirations. But try to pay as little as possible when it comes to actually investing your money. Research from Morningstar shows that the most expensive funds tend to underperform or be merged away into other funds.

8 Rebalance regularly

If your target return suggests you should have 40 per cent of your money invested in shares, make sure you rebalance back to this exposure on a regular basis, usually annually. This is not only a good discipline – forcing you to take profits from assets that have performed well and reallocate that capital to cheaper assets – but it ensures that the risk level on which you started out is maintained.

9 Be patient

It can be extremely difficult to ignore the noise created by investment commentators and forecasters, with their polarised predictions of armageddon or nirvana. But ignore them if you can. In what other walk of life would we believe people have the ability to accurately predict the future? There will be good times and bad. The secret is to keep on an even keel through both.

10 Monitor and measure

You wouldn’t set out on a journey with a map and then not look at it again, so review progress against your plan regularly. This will enable you to adapt to changes in your own circumstances and the wider world.