Two weeks ago, in this paper, I wrote an article on what I believe are the main barriers to successful investing. I described how the Investment Industry has created and cultivated a belief that when it comes to managing your money, Process and Philosophy are one and the same. They do this by effectively packaging and productising different investment approaches into complex, black- box type structures and, as a result, most of us come to believe that successful investing is tied into single, point-in-time strategies rather than any long term philosophy.
Proof of this can be seen in the business section of any national newspaper on a weekly basis. Rather than discussions about what you, as an investor, should ask both yourself and your advisor before you commit any money, we are presented with news of European Equities going down, Gold going up, and everything in between. The confusion this creates cannot be underestimated – even the so called professionals start paying so much attention to the ‘noise’ around current events and breaking news, that they forget what they have been entrusted to do in the first place.
Because so much of the Financial Services Industry is dependent on new money coming into the system, and because there is such competition for this, your, money, the majority of the Investment Industry will do everything they can to grab your attention and win your trust. The easiest way to do this is to offer what seems like the right strategy for your money, based on what the industry, media and public have agreed on at a point in time. Some of the (many ) examples include the rush to property, either directly or through funds, in the Celtic Tiger years, the dotcom mania around the year 2000, or even the more recent drive to sell cash as a suitable long term investment asset, simply because institutions needed liquidity and the general public were being sold a message of financial doom, morning, noon and night.
The truth is that in almost all scenarios of major investment growth throughout the history of financial markets, by the time we, the average investor, get invited to join in, it is already too late. We might get the tail end of a so-called ‘boom’, but inevitably things turn and we start losing our money. And at that point, rather than hold out for the inevitable upswing (that markets are cyclical is about the only thing we can say on them with any certainty ), we panic, sell out at a loss, retreat into recrimination and guilt. What’s worse is that we then have to watch the ‘market- makers’ – professional investors, media owners, the so-called elites, swoop in and buy up our losses at a discount!
So if this is the way things work, what can we do to avoid getting caught in the trap? The most simplistic piece of advice is to not get caught up in the madness of a bubble and to stay calm when the bubble bursts. In reality though, with the pervasiveness of vested interests in the media, it requires an almost inhuman level of discipline to shut it all out.
Instead, what you need is an approach to your money that recognises boom and bust for what they are – perfectly normal aspects of all economic and investment cycles – and to discount them when you actually sit down to decide how you should save, invest and spend your hard-earned money. The easiest way of doing this is to decide on an investment strategy and to stick with it, no matter what. Indeed, a recent academic paper showed that choosing a strategy is actually less important to the investor than the discipline in maintaining it! This goes back to my previous point about not listening to the ‘noise’ but rather diligently and, quite boringly in some respects, staying sensible and prudent when all others are looking for the quick win.
I wrote in my last article that technology has played a huge part in the democratisation of investment markets – finally giving the general public access to them in a way that was previously guarded by the so called professionals. The same is true of investment philosophies and strategies. Many Investment Platforms offer different types of approaches to each investor depending on their goals, attitudes and preferences. Similarly, many advisors are coming to the realisation that simply offering one-off products to clients is not working, and a more comprehensive approach is needed.
My own investment approach, both personally and for my clients, is based on a well established philosophy known as Modern Portfolio Theory. The essence of this theory is that you choose a diverse number of assets (shares, property, cash, gold etc ) based on your financial goals, and essentially stick with these assets for the lifetime of your investment. You sell off assets that do well and buy assets that are doing poorly – thereby smoothing your returns and avoiding massive highs and lows. It works for me, and it works for my clients. You can learn more about it on www.financial-planning.ie or by calling us on 091-861001.
