Investing for a rainy day: Key investment concepts you should understand
Rather than saving for a rainy day, as the old saying goes, why not save and invest now to achieve your future financial goals? Here we look at some advice from leading financial planners on the key concepts that should inform your investment strategy.
Chris Giaouris, CERTIFIED FINANCIAL PLANNER® professional, partner and principal advisor at Chronos Private in Melbourne likens having an investment strategy to going on a road trip.
“For some,” says Giaouris “they may simply jump in their car and hope that the road signs along the way will get them there. Others may spend time planning the quickest route, or the most scenic route, or the route which contains interesting stops along the way.”
The key here is that whatever option you take may get you where you are going but “the preparation will have a significant impact on the experience you have getting there,” he says.
“Investing is similar – you can either take some time to consider important concepts that will impact your investments or you can just jump in and hope for the best. With a road trip, the latter may add some excitement to your journey but with investing I would caution against such an approach,” says Giaouris. “A well thought out investment strategy can act as your ‘road map’ and help ensure you get what you want out of your investments.”
What’s your timeframe?
Continuing with the road trip theme, Giaouris says that if you are on a time schedule you are likely to ignore the scenic route and take the most direct route. “Whereas if time is not of the essence you may have the luxury of taking a longer route in order to enjoy other sights along the way.”
Giaouris says earnest consideration should be given to your timeframe for investment, and importantly, when you need access to the capital you are investing. “Ultimately, most people invest for a purpose and once that time comes the cash, initially used for investment, will be required for something else.”
When it comes to investing it pays to have a clear plan of where you want to go and when you want to get there.
Goals: Keep your eyes on the prize
When setting goals Chris Giaouris CFP® says some questions you need to ask yourself are:
- What are you trying to achieve with this investment?
- Are returns your primary objective versus limiting risk?
- Do you want to support ethical companies or sustainable business models?
“Returns are clearly important but for somebody well into their retirement with ample capital, managing risk may be a higher priority,” says Giaouris. “Or for somebody with less capital to invest, they may have no choice but to take on higher levels of risk to give their investments the chance to grow.”
“What you think you want to invest in may not be what’s best for you and your goal,” Giaouris also adds.
When formulating your investment strategy it’s important to ask yourself the tough questions, understand your risk and to get professional advice to ensure you get where you want to go.
If it seems too good to be true, it probably is
“If you don’t understand it, don’t invest in it,” says Brendan Burrows, CERTIFIED FINANCIAL PLANNER® professional, partner and senior financial advisor at PSK in Sydney.
“There is always a ‘hot stock tip’ from a friend, an investment advertised on TV, or an investment product so sophisticated and impressive that it seems like ‘a sure thing’. However if you don’t understand the investment, it is wise to stay away. Many competent investors lost a lot of money during the GFC by investing in products they didn’t understand, demonstrating the lesson to keep it simple or take the time to correctly assess the risks of investing in something more complex,” says Burrows.
Make investment volatility work for you
Burrows says that if you have a longer investment timeframe you can make investment volatility work for you. “Where equities are involved, there will be fluctuations in the value of your investment over time. The psychology of investing shows us that most investors sell their equities during downturns in the share market as they try to avoid further losses, but in fact end up locking in losses by selling out of fear.”
Burrows says to use these two principles to help volatility work for you instead:
- Use dollar cost averaging – by making regular monthly or quarterly contributions to your investment, you will have some parcels of equities bought at lower historical prices, and some parcels at higher historical prices, but overall, you are lowering the risk of your portfolio having a high cost base by investing everything at the wrong time
- Invest in a mixture of equities and defensive assets – if your entire portfolio is invested in equities when the equity markets turn down, you will not have cash on hand to buy more equities at lower prices while the markets are down. If you can maintain a regular discipline of rebalancing your portfolio of defensive assets and equities, you will be taking profits from assets that are overweight, to then invest into assets that are underweight. This will ensure you do not get caught in the trap of trying to time the markets during volatile times.
ble advice on making sure you have enough income to live comfortably and achieve your goals.
Online source: Produced by The Financial Financial Planning Association of Australia and published on 12 November 2017. Original article.