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Phil Farrelly QFA RPA SIA CFP
Certified Financial Planner | Mason Wealth Management

Have a Financial Plan

Most successful investors have a plan. They know exactly where they are going and how they are going to get there. Without a financial plan, you don’t really know where you are going. We know that short-term volatility will happen at some stage. If you have a long-term plan that is reviewed annually, you will not be concerned when things get a little bumpy on the investment journey. Any decent financial planner can incorporate a number of “what if” scenarios in the plan which will take account of market fluctuations.

Stay in the market long term

There is a famous saying that the stock market is a place where impatient people simply give their money to patient people.  People that enter the market looking for a quick return generally get badly burned.  In order to maximise returns, you must remain in the market through thick and thin.

Do not try and time the market

Timing the market is a futile exercise.  It simply does not work.  J&E Davy Stockbrokers recently published an article that makes interesting reading.  If an investor put €10,000 into the MSCI world index of shares in 1999 and left it there untouched for 17 years, they would have realised a gain of 138%.  However, if they had tried to “time the market” and were out of the market for the five best days, they would only have seen a return of 56%.

If the same investor had missed the best 30 days over the same period, they would have seen a return of -33%.  In other words, their €10,000 would have dropped to €6,620.

Ignore the business and investment media

The media have their own agenda.  They have to tell the news in a way that will help them sell newspapers.  When it comes to investments the media tend to exaggerate both good news but especially bad news.

The media tend to obsess about the “next great investment opportunity”.  They provide short-term market predictions which are often incorrect.  Any decent financial planner will never provide short-term investment predictions as, in truth, no one knows what is going to happen.  If someone has a financial plan it could be argued that short-term market predictions are really irrelevant in any event.

Minimise the costs involved

Investors have no control over markets, however, they do have control over the charges and fees they incur.  Due to the long-term nature of investing and the power of compounding, it is important to keep your costs to a minimum.

Consider the example of a €50,000 investment over 30 years.  Option A has a charge of 1% p.a. and Option B has a charge of 1.5% p.a.  Even though both funds grew at 5% p.a., there was a difference of €21,830 in the final pay-out.

Understand your Investments

You should never invest in something that you do not understand.  This is a longstanding “rule of thumb” for investors.  If you do not understand your investments you are much more likely to panic when the market “correction” eventually comes.  Having a plan and understanding everything that makes up the plan takes the pressure off when things get bumpy.

I remember getting a call from a client in July 2015 who was worried about his pension fund.  The Chinese stock market was dropping at an alarming rate.  However, when I reminded him that he had a diversified portfolio of investments and as little as 2% of his total fund invested in the Chinese market, he began to relax.  If he had remembered what his investments were made up of, he would not have panicked.

“Risk comes from not knowing what you are doing” – Warren Buffett (the best investor of them all).

Don’t invest in the REAR-VIEW mirror otherwise known as hindsight investment management

Gary Connolly of I-Cubed Limited (in Dublin 2) published material that makes a compelling argument.  Investors that make investments based solely on past performance will generally be disappointed.

He looked at a period of ten years from 2005 to 2015.  If someone had invested a once-off premium of €10,000 and moved it each year to the fund that had performed best the previous year, he would have lost 40% of his initial investment over the ten years.

In other words, investing based on past performance is not a good idea.  It is also true that funds that perform well tend to attract volumes of new business.  The stats also clearly demonstrate that assets that attract large volumes of business quite often underperform.

As Gary Connolly says “betting on Leicester after they won the premier league doesn’t deserve sympathy”.

Building a Diversified Portfolio

In order to reduce risk, it is important to invest in many asset classes.  If you diversify across all asset classes you will make the investment journey much easier and reduce volatility.  If you have exposure to many asset classes, better-performing assets help to offset those that aren’t doing so well.  If the various assets are non-correlated they will have their bad days – on different days.

We are always trying to hold assets that move in different directions at different times.

Employ a financial planner to re-balance the portfolio each year to ensure that you do not experience “drift” between the asset classes.

Leaving money in Cash is a mistake

Obviously, we all need to have money that we can get access to in a hurry.  This is called emergency savings.  Typically, three months net after-tax income should be available at short notice.  In this case, we are not talking about emergency funds.

Some people leave their savings and investments sitting in cash as they are “waiting to go back in when the markets settle down”.  This is like trying to time the markets which we already know is futile.

With deposit rates at almost zero and inflation estimated by the CSO to average around 2% p.a., leaving money on deposit makes no sense at all.  If inflation is running at 2% p.a. this means that the purchasing power of your money is being reduced each year by 2%.

If you want first-hand experience of what this is like ask someone who is stuck on a fixed income that does not incorporate CPI (inflation) increases.  Over the long term, this is not a good experience.  However, it must be said that investing is for the long term. For example, if a client felt he could need access to his money within the next five years, we would suggest that he doesn’t invest in the markets.

Don’t meddle too much with your investments

In most areas of life, success can be achieved by additional activity.  Practicing more, preparing more, paying more attention.  In a counterintuitive way investing can be different.  The most successful investors tend to be people that leave their investments alone – they don’t meddle too much with them.  One of the biggest risks to investment success can be overconfidence.  In other words, thinking that you know better than everyone else may cost you dearly.

Investors that constantly “tweak their portfolio” generally underperform the market.