I completed a B.Comm degree in 1984 and went in search of a job. I got one in the insurance industry and have been involved in this industry ever since – 33 years. That’s a long time!
Like many industries, I’ve witnessed radical changes during that time, most, thankfully for the betterment of investors, but, unfortunately despite all these improvements, I continue to see investors repeat the same mistakes since when I first started back in 1984.
What I’d like to do, is to give you a flavour of these mistakes. You can significantly boost your chances of investment success by being aware of these mistakes and taking steps to avoid them.
1 Failure to Plan
- Everybody is different but everybody needs a plan. As the old saying goes; “if you don’t know where you are going, any road will take you there”.
- You’d be amazed at the number of people we meet who have no plans. A plan can be as simple as having enough in a child’s college education fund or accumulating €2 million into a retirement fund.
- Clearly financial planning is a real challenge for people because this involves multiple time periods over an uncertain future. And that’s why people need help to do this.
- The great challenge in life is to make a plan and then stick with the plan, particularly when market conditions are unsettling. In my opinion, the lack of a clearly defined financial plan leaves people susceptible to the next get rich scheme. The key message is to Get a plan and invest your assets in line with that plan.
2 Failure to Distinguish between Risk & Volatility
- Risk and Return go hand in hand. The longer the time period you can afford to invest, the greater the risk you can take and the greater the return you will make.
- People confuse risk with volatility though. Volatility is the journey. It can and will involve temporary declines. Risk is a permanent loss of capital. This is a situation where for instance, a company goes bust and shares in that particular company become worthless. We regularly see the stock market move up and down, but the market itself doesn’t go bust.
3 Too Short a Time Horizon
- If you are saving for retirement in 25 years’ time, what the stock market does this year or next year shouldn’t be your biggest concern. Even if you are just at the point of retirement and going to draw down your funds, your life expectancy is likely to be 30 years. Therefore, you’ll need to invest your retirement funds to make them last for 30 odd years.
- Therefore, we need to become more long term in how we think of investment. This will allow us to ride out the storm. Invest in greater growth assets and ultimately we will get a better return on our funds.
4 Reacting to News
- People pay too much attention to media or react too quickly to bad news. Nowadays we are under siege from every social media platform available Facebook / Twitter / Instagram.
- News is designed to provoke a response. To provoke a reaction. News is all about headlines, Second guessing the markets and making short term news driven reactions will move investors away from achieving their plans and will invariably result in a poorer investment outcome.
5 Inappropriate Asset Allocation and Failure to Rebalance
- Asset allocation means that you invest in the assets that are appropriate to your risk disposition, return expectations and time horizon. If you need cash in one years time to pay college fees, you don’t need risk, conversely, if you need a big pension fund in 25 years time, you need to take risk to get a decent return. Therefore, you need to invest in riskier assets like equities.
- Rebalancing is the process of returning your portfolio to the asset allocation agreed at the start of the journey or plan. Rebalancing your portfolio over a range of assets will ensure your investments can withstand a wide range of market events and outcomes. Rebalancing reduces your risk and keeps you on a track to achieve your goals.
6 Lack of Diversification
Don’t put all your eggs into the one basket is a phrase that’s popular; but how many of us were caught up in the:
- Property mania in the first part of this century or
- Piled into Internet Stocks or bought bank shares only, or
- Have all our funds tied up in the bank
You don’t need to gamble on the next bitcoin share to get rich slowly.
7 Investor Behaviour
- The dominant determinant of financial outcomes is investor behaviour. Believe it or not, but investors are their own worst enemies.
- People respond inappropriately to Financial Stimuli. They get aggressive at the top of the market and panic at the bottom. Investors change their investment composition too frequently and invariably often after the horse has bolted.
- Fund managers in Ireland and everywhere else in the world will attest to the fact that the greatest number of switches out of Equity type funds into safe Cash funds, occurred in March 2009, just as the market was turning back upwards.
- We see investors sell low to buy high; the exact opposite to what they are supposed to do. Being Boring but Brave – much like Warren Buffet, will get you to where you need to be and where you need to go. In a performance mad age – you don’t need to be a hero.
- In fact, the greatest service a financial advisor can provide to clients is to act as their behavioural investment counsellor and keep our clients on track with their plan regardless of the fads or fear that will arise.