How to make a success of your investment

Learning how to save and invest is a crucial part of our lives, and we need to be more informed about it

The global credit crisis taught us all some hard lessons about investing – that we may seek returns but, more importantly, we must control risk.

Today and over the next two Tuesdays I will outline some of the main points that my recently published book has set out to make.

As we are all now aware, learning how to save and invest is not a luxury in life, it is a crucial part of our daily lives, and we need to be more informed. Just look at the consequences all around you – of us, a young nation, not having understood how to invest and control risk.

The disaster that has been wreaked on peoples’ savings and investments in the last five years, and the personal traumas it has inflicted, need not have happened if people understood how to invest.

We in Ireland have a number of hurdles to overcome when it comes to sound investing. We have had a preference for physical property-investing which necessitates the use of debt.

Perhaps now we will be more open to incorporating other asset classes into our investment plans.

We have an above-average propensity to gamble, and we associate the stock markets with gambling.

But for the vast majority of private investors, speculating can only lead to losses in the stock markets, just as it does in the bookies.

You must own an asset if you want the return from it. Trading assets does not give you the time to benefit from the natural appreciation in asset values that occurs over time. Trading assets, or speculating, is a mug’s game for the majority of private investors.

And, of course, the financial services industry – be that the banks, private client stockbroking or the network of financial and investment advisers across the country – are incentivised to sell you a product rather than provide genuine impartial advice.

Is it any wonder that technology funds were the top-selling funds in Ireland in 1999, and that leveraged property funds were the top-selling funds in 2006?

Educated

And in Ireland today, guaranteed funds and hedge or absolute return funds are the ones selling best. These funds cannot hope to deliver the returns investors have been led to expect, but few understand why.

It still mystifies me that the Regulator cannot see that the consumer is not being educated about how to invest in anything other than fee-generating products that encourage herd-like investment behaviour among both products’ sellers and their customers.

In my book, I suggest that there are just three steps to making a success of investing, which include:

(i) having a business-like plan to investing (ii) understanding volatility in markets and that volatility is not the same as risk and

(iii) having the patience to let compounding work its magic over time.

In 1973, Warren Buffett said: “To invest successfully, what you need is a sound plan for making decisions and the ability to keep your emotions from corroding that plan.”