Risk
Risk is a word often confused between advisors and their clients. All too frequently an advisor is saying the R word and meaning short term volatility and the investor is hearing “chances of losing my shirt”.
Let’s be very clear about this and define what we mean when we use the R word.
The chance of losing my shirt is called permanent loss. The money is gone and is never coming back. Often new investors describe themselves as “conservative investors”.
”Why” I ask?
Answer: Because I wouldn’t want to lose any money permanently.
Well the good news is that everybody is a conservative investor. I have never had an investor give me permission to lose 20% of their capital !!! more
Returns
Everybody wants good returns. But how do you know if you are getting a good return?
All too frequently the only way that investors think they know whether they’re getting a good return or not is whether the performance figures lie between 7% (what you can get on a one year term deposit at the bank) and 10% which is what you really would like because everybody believes that a double digits profit is a good return. Frequently investors believe that if they get more than 10%, they must be facing an increased chance of suffering permanent loss – and so a return of greater than 10% may mean that they are doing the wrong thing.
Applying the above criteria is the best way to miss out on the returns that you are entitled....more
Diversification
Investors and their advisors talk at liberty about diversification, that when pushed, it becomes very obvious that people are confused about the concept of diversification and yet it is of primary importance because it is diversification which lowers the chances of permanent loss.
The portfolios that I manage have exposure to 11,500 different listed shares in fixed interest investments all around the world. If you own 10 cows, then half of each cow is very important to you because 10% of your production is tied up in each animal. If however you own 11,500 cows, then animal is no less important as the milking characteristics of the herd. This is the same with investment. Owning 11,500 different investments reduces your chances of suffering permanent loss to effectively zero....more
Forecasting
I don’t believe in the Power of Prediction. No one has the ability to pick winners on a consistent basis. If they could they wouldn’t still be in business in New Zealand. They would be on the beach in the Bahamas and an appointment would cost a lot of money!
And yet it seems to me that the investor and the investment industry still interact like it is possible to pick winners. It’s just that the crystal ball is disguised by the corporate gloss of employing smart people or having research or having a smart process or some combination of all three.
Let’s be clear about this - if you knew ahead of time what investors should buy and sell, then you would make more money out of following your own advice rather then selling your advice. And yet everyday, “wise heads” are consulted by media and investors as to what people should do in the current economic conditions.....more
Costs
All too often investors imagine that the cost of an investment can be fully calculated by knowing the fee charged by the Investment Adviser. Oh that it was that simple!
It’s important to know that the cost of investment is more than just understanding the level of up-front fees charged because, of course, there are more people involved in the investment of your money apart from the Investment Adviser that you see on a regular basis.
The prudent management of money involves the use of the latest information technology, the legal and fiduciary constraints of custodianship, the requirement to meet the on-going compliance cost of regulation....more
