In a recent blog we took a look at the big 6 risks which exist when it comes to managing ourselves and our money. We had everything from ostrich risk (sticking our head in the sand!) to longevity risk (living too long!).
This time around we are going to focus on practical tools we can apply to our money and savings, in order to ultimately have a more pleasant investment journey, the growth we expect, and the appropriate outcomes......please keep reading!
As we try do things slightly differently here at Informed Decisions we are going to attempt to explain all this using the metaphor of a plane journey to New York, from these fine Irish shores.....chocks away!
Before we fly off into the blue yonder, if you enjoy this blog, all we ask in return is to help us spread the word, share the article with the little icons at the bottom, check out the podcast, and in general just be a huge fan of our little site! We are on a mission to make Investing and Financial Planning here in Ireland a doddle! Be delighted if you checked out our why.
What is Investment Risk?
Some say (indeed the 'Economic Times') that it is the probability or likelihood of occurrence of losses relative to the expected return on any particular investment.
In plain english therefore we can take it as the risk of your investments not doing what you expected or indeed hoped. Comparing it to a flight it's like (I would use the work akin but it sounds horrid pretentious no!?) getting on a flight from Dublin heading for New York to do a huge shopping spree but ending up in Mexico! You expect one thing but get another, and you may not be that happy about it!
Why Do Investments Go Off Course?
Lots of reasons! Sometimes investors try and fly them with only 1 engine, a risky approach indeed! Sometimes they were pointed in the wrong direction from the start (investors invested in something not in line with their goals). Sometimes they can drift off-course, and unless they are corrected they will land somewhere very remote indeed. And other times the investors try to fly the plane themselves, and inevitably they end up jumping out of the plane when they see they see it going worryingly in the wrong direction....a fatal move which leaves them alone in the Atlantic Ocean!
Nobody here wants to see anyone else ending up in the Atlantic without a paddle, so take-off into the clouds and discover how we can avoid such financial tragedies with regards your investments, savings and retirement funds in Ireland!
Use More Than 1 Engine:
Investors do this all the time, they set off on an investment investing in just one asset type, with little or no diversification. Now the D-Word is thrown around a lot these days but it is so critical in fairness. If you don't diversify you are flying on 1 engine, and if anything happens with that engine you are headed for a swim in the Atlantic!
Some investors will be attracted to the appeal of a certain share, and decide to go all-in on that, in the hope of hitting a huge return. That's 1-engine mentality and will lead to a bumpy and turbulent ride; it might work, and it might not! The path to a smoother journey (less volatile and higher chance of reaching new York York) is one with many many engines, from different countries, different asset-classes (equities/bonds/property/commodities etc). If one engine starts to sputter then another may well up it's game to make up for the other!
Know Where You're Headed:
Captain Delaney is always harping on about beginning with the end in mind, and this time it is no different! If you need to fly at 300mph in order to reach New York at the time you need to, then flying at 200mph will not do the job for you. Likewise if you only need to fly at 200mph then why would you try fly at 300mph! The same is said of investing, why take on more volatility than you need. And the flip of that is true, if you need to take on a lot of volatility in order to try achieve the returns you need, then investing in less volatile portfolio is definitely not going to do the business for you.
One of the most powerful exercises I have ever done with clients is to identify how much they need at a future point, and then determine how much return they need per annum in order to achieve that. Based on the required return they pick their speed! Makes total and utter sense to clients, and to any logical individual!
Investments can get off-course, particularly if you are diversified. Take for example, and without getting too technical, a portfolio of €100,00 invested 50% Global Equities & 50% Government Bonds, that's how it was invested on 1st Jan 2018. Say Global Equities hits a purple patch over a 24 month period, grows by say 30% and Bonds stays flat. The 50k which was in Global Equities is now valued at €65k, while the Bonds remains as €50k. The portfolio split is now 57% Equities & 43% Bonds. This may not sound like much but it is 14% swing between Equities and Bonds.......possibly exposing that investor to a lot more volatility (and indeed potential returns!!) than they initially signed-up for.....it could lead to a dangerous outcome for that investor over the longer term, so consider course-correcting, and re-balance your investments in order to stay on track for where you want to go.
Plenty of folks do it solo. A few do it solo successfully. In today's market you can invest money easily, via online, via banks, via brokers, via individual sellers. However unless you are being hand-held and communicated regularly, through both the turbulent and the happy flying times, you are essentially flying solo.
Having a pilot can ensure that you get assistance setting your speed correctly initially, it can ensure you can easily course-correct when you need to, and ultimately it can ensure you have someone reliable and acting in your interests who will tell you not to jump our of the plane if it takes a nose-dive for a period of time. They will assure you that this happens all the time, that it will happen again, will ask you to reflect on the impact of what you are thinking of doing, and will assist you back to your seat, put on a good film, and fill your glass with whatever it is you are having yourself!
A trusted pilot will manage that behaviour, that is where the value of a credible and coach-like financial advisor will pay for themselves multiple times over, but only if they are actually hand-holding. If all they are doing is selling you an investment and wishing you good luck with the flight they are not an advisor. Fact!
As New York Times Best-Seller Dr. Daniel Crosby discussed with us on our recent interview, 'you cannot do this alone'. Technically of course, you can, but to do it successfully....that is achieved only by very few.
Whats The Bottom Line:
As I sit here at 10pm of a Friday night writing these words I feel like I haven't had the time to write a short blog this week! I do however feel that this piece will stand the test of time. The message is clear, I hope that the metaphor connects with you, and that it will assist you in managing your money, whether that is children education funds, long term investments, or indeed pension funds...the same rules apply.
Have a safe and fabulous flight my friends....
QFA | RPA | APA | Qualified Coach