By David McEwen
Friday 22nd December 2000 |
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Successful investors tend to take a structured approach. Here are few tips which might help that New Year resolution become a reality.
- Have a plan
Many people invest at random, buying assets based on guesswork, a tip from the next door neighbour or speculation in a newspaper article. This usually results in portfolios that are wrongly weighted, poorly diversified and with risks that are disproportionate to likely returns. It is far better to map out what you want and how you will achieve it. Start with setting the level of return you want and the risks you are prepared to take - and make sure you are comfortable with both.
- Balance risk and return
It is important to find a balance between these two driving forces of investment decisions. Having all your money on deposit at the bank is pretty safe, but returns will be miserable. Mortgaging the house to buy the latest technology share may not be such a good idea. A rule of thumb is that the greater the risk, the smaller the percentage of your portfolio should be invested.
- Count those fees
Every investment involves a cost, whether it is brokerage, administration fees, insurance or running costs. These need to be included when calculating the likely returns from an asset. Most unit trust managers, for example, charge a fee whether they make money for you or lose it. There is a surprising variation in fees and costs among financial advisers, so shop around.
- Consider liquidity
Liquidity is a term used to describe how easy it is to buy or sell an investment. Trading shares in a large company is easy because there are millions of shares and thousands of shareholders. This makes it easy to find a buyer or seller. It is not so easy to get out quickly with small companies that may have only a few hundred shareholders. The same applies for listed companies versus unlisted.
- Don't rely on the rear view mirror
Past returns are not always a prediction of the future. Many people move their money into funds or shares that did the best in the previous year, hoping to benefit from a repeat performance. As a result they end up buying assets after they have already gone up, which is rarely a wealth building exercise. It's a fast moving world out there and few assets are able to consistently beat the average. Investors shouldn't blindly rely on past performance when making decisions. Instead, it is worth considering what factors led to that performance and estimate how many will apply in the year to come.
- Review that plan
Writing a plan then putting it in the bottom drawer is no better than investing at random. Circumstances change and investors need to be flexible. If things are looking gloomy, it might be time to increase the portfolio weighting in lower-risk areas. If the economy is heating up, it could be time to move in the other direction. Make an effort to review your plan once a month, and adjust where necessary.
David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. He is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. He can be reached by email at davidm@mcewen.co.nz.
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