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How to Invest

How to Invest Intelligently – Part 3 of 5

How to Invest Intelligently Steps 7-9

Part 3 of How to Invest Intelligently – at last! I wonder if your year has been as busy as mine?!


7. Be in control of your own money

Have you ever used a Financial Advisor to tell you how to invest? If so, why? Why did you need advice? What was it that you didn’t know, or couldn’t find out, or work out yourself?

Have you ever been to a doctor, or specialist who has advised you on a particular course of action? Did you do what they said?
Do you get calls from a stockbroker, telling you about the next company whose value is about to skyrocket, or fall in a heap, and suggesting that you buy or sell accordingly? Did you take their advice?

It’s worth thinking this through. When we seek advice from others, it doesn’t necessarily follow that we must TAKE their advice! If we make the assumption that getting advice = taking that advice then we are HANDING OVER CONTROL to that advisor.

We all have our own set of values and objectives. When someone else tells us what to do, for example, how to invest, they are contributing their knowledge to ours, and then offering strategy according to their own values, and their (usually limited) understanding of our objectives – if they consider our objectives at all. (Often they are more interested in their own objectives!) Of course a good advisor will take your objectives into consideration, but it’s very easy for them to still impose their own values.

To stay in control of your money, when you do get advice, add the knowledge component to what you already know, and weigh up the pros and cons of each path of action YOURSELF, and take your own advice.

I am not licensed to give financial product advice, however I am a coach and educator. I had a client with whom I had several discussions about the various options they had, to handle a separation and the related re-structuring of their assets, and how that would affect them and their ex-partner’s pension status. This client was fantastic at asking questions, talking through the issues, then going away and putting it all into their own spreadsheets and scenarios, and finally coming up with their own strategy, which they got on with and executed nicely. They remained firmly in control of their situation and their finances. Only they knew what truly mattered to them, and what strategy would achieve that.

Who is making the decisions that affect your money?

Have you ever handed over money for someone else to make transaction decisions with?

This is the most common way that investors lose control over their money. I know people who have handed over their money to others who seem to know how to invest, for them to wheel and deal with, because those others were so good at it and got great returns for themselves. So for a fee, they would wheel and deal for others. This went ok for a while and then – whoops – something went wrong and it was all lost.

This has even happened to me! You live and learn.

What did I learn? That the CONTROL factor is really important to me.

And actually, when you think about it, many forms of investment involve handing over some control. When we purchase units in a managed fund, or shares in a company, the value of our holding is affected by the trading decisions of fund managers of company management. We can do nothing to influence the decisions of fund managers, and the strength of our shareholders vote is related to the size of our holding which is typically a dot in the ocean.

And sadly I also know people who have handed money to others to invest for them, and those others have disappeared from circulation with that money! A word of caution here. You should never do this! Even if you work with an advisor who recommends you place money with certain products – the money goes straight to that product manager. Never to the advisor first!!!

So in reality, we rarely have complete and total control over our money, because even just sitting in the bank, it’s value is influenced by what is going on in the economy, and good old inflation.

However, I believe a savvy investor will weigh up the issue of control, and maximise how much they have, with any particular asset class they invest in.


8. Understand what risk is.

You hear something described as a risky venture.

What does that statement mean to you?

To me, it means that if you put money in, you could lose it.

You’ll often hear that risk is volatility (in price, or value). I disagree with this description. I think that risk means chance of loss.

If something is highly risky, there’s a high chance of losing money.

When we consider how to invest and what assets to purchase, we need to consider the risk – that is – that chance that we could lose money. We need to consider what scenarios could cause the value of our investment to decrease. And how likely these scenarios are.

Are you yawning yet?

Risk assessment is very un-sexy, and very necessary. This is where investing gets – well – tedious.  I’ve heard it said that wealth creation should be boring (i.e. – not sexy) and I kind of get that – in fact I’ve said it myself. But risk assessment is in a class of its own. Tedious.

But it’s vital!

We need to identify the risks of investing in any particular asset class, minimise them where possible, and decide whether we could tolerate the worst case scenario.

Once upon a time my husband and I invested in some agribusiness shares. Our accountant at the time recommended it, as it was “safe” and gave us a tax deduction. We owned some trees that would be later sold for construction timber. We hadn’t learned to assess risk at the time. Didn’t give it a thought.

Many years later, that business dwindled to nothing, as did the value of our shares. Why? The managers of the business decided to build the enterprise and grow other things (avocados and almonds if I remember correctly). That decision brought the company undone (long story) and then it was wound up by liquidators, who sold our trees to help pay back their debt.

This was a worst case scenario. Once you’ve experience this a few times, you really understand it.

As a result, now I am very very nit-picky when I’m assessing the risks of any investing venture, and I’d encourage you to be nit-picky too!


9. Diversification – the pros and cons

Don’t put all your eggs in one basket!


Because if you drop the basket you’ll smash and lose ALL your eggs.

What if you treat that basket with extreme care, and never put it in a position where it could get dropped. What if you enclose it in a bunker that could withstand an extreme event?

Hmmmm…. It’s tricky.

When you put your eggs into several baskets, you then have to juggle the baskets and look after them all. And if one basket is multiplying much faster than the others, then do you put more into it (so that the multiplication has more to work with ) – or take more out of it (and put the proceeds into the other baskets, to keep things evened out)?

OR maybe you have two baskets because you know that when one does well, the other one doesn’t, so they balance each other out. But hey – doesn’t that mean that you’re limiting your possible returns?

This is a big subject, and this article is already way too long.

Suffice to say, the general instruction to diversify is not as clear-cut as it seems.

I think that CONTROL is way more important.


Til next time,

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