| The availability of investment news and | | | | much greater impact on your long term wealth |
| information has been increasing over time. This | | | | than a strategy that focuses purely on your |
| has led to an improvement in most people's | | | | specific investments. |
| understanding of general investment concepts. It | | | | The "default" investment strategy |
| has created the opportunity for many to choose | | | | The natural investment strategy for most |
| to manage their own financial affairs. | | | | households is driven by the availability and timing |
| Knowing "where" to invest your money is an | | | | of surplus cash. |
| important part of the financial management | | | | Generally, households tend to generate more |
| equation. However, by itself, it's far from | | | | savings in the latter years of their working lives |
| comprehensive in terms of an investment | | | | than the earlier years. It is not uncommon for |
| strategy. | | | | households to invest over ¾ of their lifetime |
| Consider the Storm Financial model of advice. | | | | capital accumulation within 10 years of retirement. |
| They used an eminently sensible and highly | | | | In the years prior to this, surpluses are used to |
| diversified investment approach for managing the | | | | reduce mortgages, fund school fees and buy |
| underlying investments for their clients . Their | | | | lifestyle assets such as cars, boats, renovations, |
| investment strategy at this level was not the | | | | etc. |
| cause of the problems their clients would | | | | The dilemma for many who unwittingly apply this |
| eventually experience. Simply knowing "where" to | | | | "default" strategy is that they acquire most of |
| invest their clients' funds was not enough to save | | | | their investment exposure over a relatively short |
| their clients from financial disaster. | | | | investment horizon. If these acquisitions happened |
| They failed to adequately address: | | | | to be at the end of a cyclical bull market, it could |
| - The size of the investment exposure relative to | | | | have quite catastrophic implications. |
| their client's lifetime capital accumulation amount | | | | On the other hand, if you were lucky enough for |
| (i.e. the question of "how much" to invest), and | | | | your pre-retirement years to coincide with a |
| - How to manage the entry risk for their clients | | | | cyclical bear market, you could end up acquiring a |
| (i.e. the question of "when" to invest). | | | | lot more market exposure than you would have |
| This part of their investment strategy was not | | | | under more optimistic conditions. The challenge for |
| only grossly naïve, it failed to adequately | | | | these investors is to recognise their good fortune. |
| address the personal circumstances of each | | | | Many fail to do this and shy away from investing |
| investor. | | | | during declining markets. |
| The strategic decisions they applied seemed to be | | | | Your investment strategy shouldn't rely on luck |
| based on: | | | | An investment strategy that may not |
| 1. "how much?" = as much you can borrow, and | | | | differentiate at the specific investment level but |
| 2. "when?" = as soon as possible. | | | | sets a clear and personalised strategy for |
| Apparently, this strategy was applied regardless | | | | managing your investment exposure over time is |
| of whether the client was a young accumulator or | | | | much better than one that differentiates at the |
| an elderly retiree. | | | | specific investment level but ignores the bigger |
| How personalised is your investment strategy? | | | | picture. |
| Many investors confuse personalisation of an | | | | A smart investment strategy considers much |
| investment strategy with choices at the specific | | | | more than the investment of your current capital. |
| investment level (e.g. I prefer BHP over Rio Tinto, | | | | It takes into account your projected savings |
| or Australian Shares over International Shares). | | | | capacity, the timing of these savings and your |
| While this is a form of personalisation, it generally | | | | risk parameters to build a strategy that reduces |
| doesn't add any long term (risk adjusted) value. In | | | | the element of luck and focuses on giving you the |
| fact, personalisation at this level generally has a | | | | best chance of achieving your objectives. |
| long term cost. | | | | While this approach requires more effort (and |
| It may help to retain a client though, or convince | | | | knowledge), the payoff of a personalised |
| a DIY investor to continue with their approach | | | | investment strategy is to shift the odds in your |
| over other (more generic) alternatives. | | | | favour. |
| True personalisation of an investment strategy is | | | | Receive monthly notification of new articles by |
| at the broader level of managing investment risk | | | | signing up to our Smart Decisions blog now. |
| exposure over time. Arguably, this will have a | | | | |