It is not uncommon for investors, particularly those in superannuation or retirement savings schemes, to be unfamiliar with how their money is being invested. All too often, there is disillusionment when the investment does not perform in line with the investor’s expectations. In most cases, this is not because the investment has been a poor performer, but because the investor either had unrealistic expectations of the investment or did not understand the nature of it. An investment portfolio or retirement savings scheme needs to be treated like a member of the family. It needs to be understood, nurtured and brought back to health when it isn’t doing very well. Having a stranger in your house brings about a degree of tension and discomfort, whereas with someone you know well, you know what to expect and what actions to take. Get to know your investments so you feel comfortable with them. This means giving them attention rather than putting them into the bottom drawer. Read the investment statement and the performance reports you receive. If you don’t understand them, ask questions and spend time on them so you do. If you are invested in managed funds, make sure you understand what kind of assets the funds invest in. Stay in tune with what is happening in each of the main investment sectors (fixed interest, property and shares) and the global economy. This doesn’t mean you need a degree in financial analysis or economics; it just means you need to take an interest in financial matters in the news and to have discussions with other people who are experts, such as your financial adviser, or friends with particular expertise. Each week, take time to learn something new about investing, perhaps by reading a book or going to an investing website or blog.
16 January 2012
22 July 2011
The last ten years in investment markets has been a rough ride what with the dot com bubble, the Twin Towers disaster and the Global Financial Crisis amongst other things. The investment recommendations of financial advisers have been under close scrutiny and some have found themselves in court. Good advisers use a thorough process for making investment recommendations, starting with a comprehensive interview with prospective investors, leading to analysis and research, portfolio design and finally product recommendations. Failure to understand an investor’s attitudes towards risk and return and failure to understand product risk have been the two primary causes of complaint against advisers. Recommending products from the thousands available in the market requires extensive research. For small advising firms this is simply not cost-effective and many purchase research from specialist research companies. Increasingly, advisers are using what are called ‘model portfolios’. These are portfolios researched and designed by experts to fit a range of investment profiles from conservative through to aggressive. With any investment portfolio, the key decision to be made is how the portfolio is split between the four asset classes of cash, fixed interest, property and shares. The adviser’s principal responsibility is to recommend the most appropriate split based on their understanding of the investor and to then select a fully researched portfolio of investment products based on that split. There are several advantages of using model portfolios for both investors and advisers. For investors, there is the confidence of knowing that the portfolio has been extensively researched and is constantly monitored for performance. Adviser time is spent with investors, understanding their needs, keeping them up to date with market information and answering their questions. For advisers, the risk of recommending inappropriate products is considerably reduced. Model portfolios make good sense and their use is bound to increase.