The behaviour gap

The investment return is the rate at which an investment grows in value over a period of time. It is based on the assumption that you invest a lump sum at the beginning of the period, and then you leave it alone.

However, the investor return (or what the investor receives from their investment) is often far lower. Why? Because of investor behaviour. By not holding onto their investment over the long term, they receive a lower return when they sell. Evidence shows that those who hold on to their investments have been more successful than those who try to ‘time the market’ by buying stocks at a low price and selling at a high price.

The value of a financial planner

Elegant simplicity

Many investors believe that investing is extremely complicated, requiring long hours of dedicated research and elaborate strategies to be successful.

The truth is that successful investing is very simple. It’s not about chasing the next big thing. All it requires is a clear goal, a well-defined, long-term strategy and a strict discipline to stick with it. It’s staying the course which can be the most difficult aspect of investing, and where your financial planner can help the most.

Current reality goal

The most important thing to understand about investing is that you do it in order to achieve a goal; not necessarily a financial one, but one which will need financial security.

The next important thing to understand is that there’s rarely a straight path to achieving that goal. Your investments will go up and down in value and sometimes achieving that goal may feel far away. Your financial planner can help you to keep that goal in sight and help you to achieve it ensuring that despite the ups and downs.

Diversification

If we all knew which investments will rise and fall in the next year, then investing would be easy!

The fact is that the value of investments will go up and down, sometimes within a year, sometimes within a day. The skill of your financial planner is to ensure that you have a range of investments so that if one performs badly, the fall in value will be made up by those investments which are performing well.

Portfolio design

Successful investing is about having a diverse range of investments and being prepared to invest for the long term.

Key to this is ensuring that you have a well-constructed portfolio of investments which covers a variety of asset classes, such as shares (equities), bonds (fixed interest stocks), real estate, cash and commodities. This will spread the risk of all of your investments falls. However, your financial planner will ensure that your portfolio is appropriate for the amount of risk you are willing and able to take.

The only goal that matters

Investing is not a goal in itself. Rather, investing allows you to accumulate wealth which will enable you to reach your personal goals.

So before you begin to pick stocks and shares, you need to ask yourself: “What are my life goals and what financial security do I need to achieve them?” Your financial planner can help you to answer this all-important question. Until you find the answer, you should avoid jumping into investing.