Be Careful Out There
Over the last number of months, a number of clients have been referred to us looking for investment opportunities or better returns. This combined with a number of conversations we have had with some of our existing clients, has prompted me to right a brief note in this month’s newsletter.
When you consider what interest rate your bank will offer you and compare this to property fund returns and stock market returns over the last 9 years, the lure from cash can be very tempting.
It would be very easy to chase these returns by viewing performance over the last number of years. In addition, the marketing companies are in overdrive to tempt you to invest your monies.
No doubt there will be other investment opportunities that will present themselves over the coming months and some of these will seem like the next sure thing!
Having provided advice through a number of different economic cycles, the confidence that comes from an economy that is growing steadily can lead us into a comfort zone and entice us to make emotional decisions, which we can later regret.
I have set out below a number of questions we ask our clients to consider before they make any decision.
1. What does the bigger picture look like?
We would like to know what you and your family would really like to do over the coming years. In effect, we are trying to get you to think about what lifestyle you would like to have in the future and then budget for this. We are trying to find out if you have enough money based on your assets, liabilities and future income v expenditure. This is known as Financial Planning. It helps prevent you from making investment decisions in isolation.
2. Can you afford to spend this now?
Life is for living. Too many clients save money on the basis that they will need it in the future. We will never be as healthy as we are today, so we encourage clients who would like to take that holiday, change that car, do work on their home, to do so while they can enjoy it.
This can be difficult to do as the guilt of spending the money can hang over us all. We find that if our clients understand what they can afford to spend and still have enough, it eases their conscience.
3. Why do you want to make an investment?
Sometimes clients come across investment ideas from friends or work colleagues. They can also be part of a mass marketing campaign which targets a particular profession. On other occasions, they can be looking for something because they feel they are losing out by not doing something.
In our experience, we have found that our peers generally tell us about the good decisions they have made, not the bad ones. This can sometimes feel; that everybody is making smart decisions which is definitely not the case.
Everybody’s financial situation is unique. What may be a good investment decision for one person does not mean it is a good decision for you.
4. Do you need to make a return on your money.
It could be argued that if you don’t need to make a return on your money, then why take the risk?
5. Are there other options with this money instead of investing?
With an extremely low interest rate environment, it could be argued that interest rates can only go one way – up!. If you have a mortgage, paying money off your debt can be seen as good advice. This allows you to be mortgage free earlier.
6. What is the worst thing that can happen?
Sometimes with marketing literature, an investment opportunity can be talked about in glowing terms however, sometimes issues can be identified if you read the small print. It is important to fully understand the upside if things go well and the downside if things go wrong. Investing is about the long term. If you understand what an investment can do, then you can prepare yourself, which will reduce your emotional reaction and in turn potential investor errors.
Financial Planning also allows you to understand the implications of an investment going wrong and how this will impact you and your family’s wealth. Sophisticated Financial Planning software allows us to model these potential losses and how they could impact your plan before you make the decision to invest.
7. Is emotion at play?
Sometimes our decisions are made with our gut or are emotional. Before you decide to commit to any investment decision I would stress the importance of walking away from the moment and assessing your options with a cool head. This will help you to take emotion out of play. Marketeers are very clever at how they position investment options and use behavioural biases to help them influence investor decision making.
8. Get a second opinion
It is a good idea to get a second opinion from somebody you trust that has no connection to the investment proposal.
9. When might you need this money?
Any investment should be for 5 years or more. If you think you might need this money in less than 5 years then don’t invest.
10. Is the investment diversified?
If we remember back to Anglo, AIB and Bank of Ireland, these shares had performed well for a long time and were providing decent incomes. However, they were all focused on one particular sector and in too few companies.
Our recommendation with any possible investment is that it should be diversified i.e. between different geographical regions, sectors and asset classes. If your investment is diversified then you are protected against greater short term losses if one particular sector or asset class drops.
History does repeat itself and you will come across some good opportunities but you will also come across some bad investment options as well. All we are asking you to do is to be careful out there.
A well diversified portfolio invested over the long term will provide you with a good return.
Some of these old adages have stood the test of time for a reason.
- If it sounds too good to be true, it normally is.
- If your friend put his hand in the fire, would you.
- Don’t put all your eggs in one basket.
- What goes up must come down.
- Patience is a virtue.
- Good things come to those who wait.
- There are no pains without gains.
- Slow and steady wins the race.
- Be prepared.
Feel free to talk to us about any opportunities that come your way so we can help you make the right decision.