5 Facts You Should Know Before Investing
So after billions spent in research over decades of investment management, what has been learnt? What indisputable truths have been gleaned from the reports, published papers and eminent journals?
The first fact agreed on by almost all investment analysts is that the majority of returns are generated from being in the right asset class: cash, bond, property and equities at the right time. So the simplest investment strategy is to predict the best asset class and invest all of your money into it, easy right? Unfortunately, whilst most returns are achieved from being in the right asset class at the right time, the ability to predict the future is not something anyone has achieved consistently over any reasonable period of time.
The second fact is that charges, whether they are the salaries of the board of directors of a listed company e.g. Microsoft etc. or fund charges, affect returns. Charges for investment management and any product used to access the investment are taken from your original investment amount and/or profit. Equally, executive pay and awards are deducted from company profits. Generally, charges are taken regardless of whether you make a profit or not, so you will need to make sure you understand how and when they are taken before committing to any investment. Low charges are not necessarily the best option but knowing the market rate for talent will ensure that you are not paying over the odds.
Fact number three is that past investment performance is no guide to future returns, whether investing in funds or directly into any asset class. This is because the global economy, in which we all invest, is a highly complex structure and specific circumstances are rarely repeated. It would therefore be unlikely that the investment manager or asset would repeat the performance achieved in the past. It may be better or worse. Past performance just shows how they managed in a specific set of circumstances.
Fact four: all investment carries risk. Just as with everything in life there are risks. However it is important to understand what those risks are in so far as possible. For example, there is a big difference between crossing a country lane and crossing a motorway.Both could be described as crossing a road but the risks are very different. It is never possible to know all of the risks associated with any investment so you should limit your exposure to any investment to that which you can afford to lose.
The fifth fact is almost universally agreed on is: for investors to achieve the best returns they should invest in a broad spread of assets. Diversification of investment helps reduce the risk in fact 4 and enables investors to capture the returns of the best asset class in fact 1.
So that is a summary of what the investment industry has learnt over the years. There are reams of reports and analysis that I’ve not mentioned but when it comes to investing in the major asset classes: cash, bonds, property and equities, most of it is explaining one of the above facts or developing a new theory. Next week I will show you how to invest cost effectively.