When you buy a big-ticket item, such as a car, you do your homework, right? You consider the type of car that would suit your needs and pocket – family sedan, hatchback, SUV, whatever. Then you look at actual vehicles on the market, taking into account make, reliability, maintenance costs, condition (if it’s second-hand), value for money, and a range of other factors.
In fact, you probably spend many hours over days or weeks before you commit your hard-earned cash.
So why is it that so many people don’t do the same with their investments, especially their life’s savings, which are likely to involve a lot more money than the price of a car? A single bad decision, made perhaps on the spur of the moment, can ruin you financially for life. And, sadly, you will not be the only one affected – the people you love the most will also suffer.
Bad investment decisions are often the result of people putting their trust in someone they think knows more than they do about investing. Too often in the past, the “experts” we trusted with our money were smooth-talking salespeople whose prime motivation was the commission on the “sale”, not our welfare.
Thankfully, that scenario is quickly changing for the better, through legislation such as the Financial Advisory and Intermediary Services Act, promulgated as far back as 2004, and, more recently, the Treating Customers Fairly regulatory approach, which incorporates the Retail Distribution Review (see my article “Financial advice is turning in your favour”).
But this column is not about financial advice. It is about you taking responsibility for your investments. Because even with the best financial adviser in the world (and there are now many very good ones out there), it is your future, not the adviser’s, that is at stake.
Knowledge is key
Investing hinges on probabilities. You can never be certain that your money is 100% secure. But you can minimise the probability of loss – and you can do this to a large extent by knowing what you are investing in.
In finance, a thorough check on the feasibility of an investment is known as a due diligence assessment. When it comes to your money, you need to practise such due diligence – not in the depth that an adviser would (and is legally required to do) when choosing suppliers and products for clients, but enough to assure yourself that the investment is solid and the chances are high that it will meet your expectations.
Investment guru Warren Buffett has a mantra that has served him well: invest only in that which you understand. If it is a company, its structure should be simple, its debt levels low, its means of making profits easily identifiable, and its prospects good. If it is a fund, it should likewise be simple, investing in companies that show the above characteristics.
Even highly qualified asset managers get it wrong and Steinhoff is a prime example, with a complex structure that no one could figure out, high levels of debt, and questionable profitability. Remember, a Ponzi scheme is an investment whose returns rely mainly or wholly on deposits from new investors, and it is increasingly looking like Steinhoff was a gigantic Ponzi scheme.
Recently, I read about a popular UK hedge fund, the Standard Life Global Absolute Return Strategies Fund. According to the article in The Guardian, the fund was launched in 2006 as “a hedge fund for the masses” that would make 5% a year more than savers would get from bank accounts, without the volatility of the stock market. That’s quite a promise.
In the early years the money gushed in, reports The Guardian’s Patrick Collinson, and quickly it became the UK’s top-selling fund.
“But over the past five years the fund’s performance has dived. Someone who invested in May 2013 has seen their money grow just 0.7% since then, compared with the 43.4% gain in the FTSE All Share Index.
“Over the past year, as the FTSE 100 has reached a new peak, the fund has fallen by 2.8% in value.
“The returns are so poor that even if investors had left their cash in the bank five years ago at the current historically low deposit rates, they would have earned more,” Collinson writes.
Alan Miller, a senior figure in Britain’s investment industry, has called the fund, which is heavily dependent on derivatives, “ridiculously complex, with significant trading costs and counter-party risks accompanied by a delusional aim”.
In journalism we have an acronym, Kiss (keep it simple, stupid), by which we try to abide. According to Wikipedia, Kiss originated as a design principle in the US Navy around 1960. The principle states that most systems work best if they are kept simple rather than made complicated; therefore simplicity should be a key goal in design and unnecessary complexity should be avoided.
Something to bear in mind when deciding where to plant your money.