Understanding what you invest in
A good way to minimise your risk is to only invest in what you understand. All too often people get carried away by flashy brochures and slick sales people who sell ‘exotic’ or ‘guaranteed high return’ investments. Yet, if you stick to what you know and understand, you can potentially avoid a lot of bad investment decisions. If it does not make sense to you, maybe you shouldn’t invest in it. Even the most well-known investor in the world, Warren Buffet, follows this principle: if you don’t understand a business, don’t buy it. The same goes for your investment decisions: if you don’t understand the investment, don’t invest in it. As part of your decision making process, you should consider the following in particular:
The people I meet who have lost substantial amounts through ‘bad’ investments generally have one thing in common: they invested in products that were very complex and not very transparent. In other words, it was very difficult to work out what exactly they had invested in, and typically these products also had a high level of in-built fees, which unfortunately are not always apparent. Often these investments are built around complex financial instruments such as derivatives, but dressed up as mainstream, ‘safe’ products. They are usually sold with a big marketing push.
How easy is it to convert your investment into cash? Some investments are very illiquid or do not offer any exit opportunities until a certain maturity date. For example, some unlisted property funds or syndicates may not offer any exit opportunities for a few years, unless one of the other investors is willing to buy your share. This does not mean that you should not invest in such products, but you should at least be very mindful of the potential consequences of not being able to sell your investment when you want to and/or at the price you want. There are also certain hedge funds or other sophisticated products that offer limited exit opportunities, for example every quarter rather than daily like typical managed funds. It is generally a good idea to have an investment portfolio that offers sufficient liquidity and the closer you are to retirement, or the higher the probability that you may need to access your capital, the higher your focus on liquidity should be. Many investors are reluctant to have large amounts of cash due to the historically lower returns, but experience has taught me that it can be very useful and reassuring to have access to cash. For example, it can smooth out returns when share market returns are negative, and it can also help you ride out those downturns without having to sell assets (see the Bucket strategy we discussed in one of the previous chapters). As such, cash can act as a sort of insurance policy for your portfolio.
If you would like to discuss your investment options or would like a second opinion on your current portfolio, please contact me on 08 9381 2704 or firstname.lastname@example.org
Disclosures and disclaimers
Yves Schoof and Affluence Private Wealth Pty Ltd are Authorised Representatives of Synchron | AFS Licence No. 243313. This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax and/or legal advice prior to acting on this information. Before acquiring a financial product a person should obtain a Product Disclosure Statement (PDS) relating to that product and consider the contents of the PDS before making a decision about whether to acquire the product. The material contained in this document is based on information received in good faith from sources within the market, and on our understanding of legislation and Government press releases at the date of publication, which are believed to be reliable and accurate. Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee, nor its employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.