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Seven Pearls of Investment Wisdom |
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10 January 2011 |
If you've returned from your Christmas festivities and New Year debauchery, hoping to find inspiration and enthusiasm from the ever effervescent Justin Urquhart Stewart, then I am indeed sorry to have to disappoint you.
If you've returned from your Christmas festivities and New Year debauchery, hoping to find inspiration and enthusiasm from the ever effervescent Justin Urquhart Stewart, then I am indeed sorry to have to disappoint you. Whilst Justin is still recovering, it has fallen upon me to drag this column, my sluggish mind and lethargic body (which is still paying the price of over-indulgence and under-exertion) into the next decade. And what would a New Year be without New Year resolutions? Like Tom without Jerry, like Bill without Ben, or Cameron without Clegg.
So in addition to the resolutions you may have already made about eating your 5-a-day, quitting smoking, being nicer to your colleague, or giving up your celebrity crush on Jon Hamm (he of the sexy voiced Don Draper/Mad Men fame), 7IM have suggested 7 investment resolutions for you to consider.
- I will...learn to control my costs. Given how frequently I go out to grab a sandwich and return with a new pair of shoes, this is definitely a case of do as I say, not as I do. However, curbing your spending is a simple idea that relates as much to your investment portfolio as to your household budget. High costs are the single most detrimental influence on your portfolio's long term return. You can control your costs by paying attention to a fund's Total Expense Ratio (TER). This is a sum total of the costs involved in running a fund - paying the manager, printing literature etc, expressed as a percentage. Many ETFs are a good source of low cost investments as they can have a TER of 0.50% or even lower. In short, low TERs tend to be strong indicators of performance and should be a key part of your fund selection process.
- I will...not try to time the market. Repeat the following three times: I am not Paul the Octopus and I cannot tell the future. Now that this epiphany has taken root somewhere in your subconscious, it is sure to grow and serve you well in the year ahead. Timing the tops and bottoms of the market is the holy grail of investing and the lack of a crystal ball makes this job extremely difficult and unforgiving. Even experienced fund managers can mis-time the market, with serious negative ramifications. Which brings me neatly onto....
- I will...invest for the long term. One way to get around the timing problem is to learn not to be afraid of the C word and make a Commitment; a big word that comes with big results. One need look no further than Justin's often repeated, "it is not timing the market but time in the market." Investments are supposed to be long term commitments. A buy and hold strategy means that you refrain from trading away your returns through higher transaction costs. The core of your investments should have a lengthy time horizon whilst you can (cost permitting) make trades around the periphery; top-slicing your profits or increasing your exposure to a stock or sector in small magnitudes. When it comes to fund selection, look at the five year rolling performance to judge a portfolio managers skill rather than reading too much into last years returns.
- I will...spread my risk. I am probably (hopefully) preaching to the converted here but would you go to Vegas with a bag full of cash and put all your chips on red? Exactly. Learn to love these three little words: diversify, diversify, diversify. Not all investment types behave in the same way. Typically when equities are going up, bonds behave in the opposite fashion and head lower. You can spread your risk by investing in different geographical regions, different stock market sectors and different asset classes.
- I will...keep it simple and liquid. Leonardo da Vinci said "simplicity is the ultimate sophistication" and it is a sentiment that is especially appropriate in the world of investing. Stick to investing in something only if you can fully understand it. Some of the more complicated investment types like derivative strategies, hedge funds and structured products require a certain level of understanding that is sometimes even beyond investment professionals. Also choose investments that don't have a 'lock-up period' - a window of time in which investors are not allowed to redeem or sell shares. Should you need to liquidate your assets, you don't want to discover that your returns will be eroded by paying redemption fees, or that redemption may not even be possible.
- I will...dare to be different. Try to avoid always following the crowd and investing in themes or stocks that have become 'hot'. Dare to be contrarian and do the opposite of what the experts/market is telling you to do. In the words of the immortal Robert Frost, take the path "less travelled by and that will make all the difference."
- I will...learn to love my Financial Adviser. On the scariness scale they rate somewhere below seeing your dentist but above your old headmaster. A Financial Adviser can help clarify your investment goals - whether you require regular income to pay for your children's school fees or need to protect your wealth, with high returns taking a back seat. Independent Financial Advisers and Financial Planners can also help identify how much risk you are comfortable taking and provide expert advice to help you make investment decisions and maximise your returns. Whilst making these decisions, don't forget to take your tax considerations into account. Some investments will be more sensible choices designed to be rational investments that also save on your tax bill.
Regardless of whether you manage to stick to your New Year's resolutions, or they fall by the wayside by mid January, we hope you have a prosperous 2011!
Aparna Ram
Investment Analyst
Seven Investment Management
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