As someone who is in the investment advisory arena for more years than I actually care to remember I am often asked, by clients and financial media alike, what investments would I recommend to potential investors. My answer is always the same – None! My reason for such a statement is that there is no such thing as a standard investment client. Everybody is different by virtue of their family circumstances, their need for capital and or income, their personal assets and liabilities as well as their own approach to dealing with risk.

The key to making any investments lies not in putting one’s faith in a fund manager or a fund promoter but rather in understanding how someone should be handling their own finances, what goals in life they have for themselves and their family and then focusing on what money needs to be set aside for this future taking into account current monies and future savings. Then, and only then, can an estimate be made of  what rate of investment return is needed to be attained in order to achieve these goals.

By identifying what investment return is needed a potential investor is then in a position to understand what level of risk has to be taken. Any investor should then weigh up whether the potential return not only on their investments but also on how it might affect their family’s life, was worth taking. In recent years people got obsessed with keeping up with the “Joneses” and following other people’s investment choices rather than their own. Instead of actually focussing on what was important in their own lives they sought to emulate others who they perceived as “in the know” or smarter.

In so doing, they missed the essence of Financial Planning, which is what the starting point is for any investor. Financial Planning is not actually about money, but about people or rather the fulfilment of their dreams by making them financially independent and causing these dreams to be fulfilled.

People’s dreams are unique to each individual. With some people, it might be having enough money for retirement, for others it may also include funding for university and or secondary school fees, buying a holiday home or clearing down debt quickly or indeed any number of financial issues that are important to them.

Part of the approach to future funding and investment returns also needs to examine what an individual’s level of personal expense is and whether this is sustainable going forward into the future. If you can manage and control expenditure you may actually free up other monies for savings and investment.

Knowing what amount of monies are available then allows an individual who has an experienced investment adviser to project what a reasonable rate of return might actually generate at fixed dates in the future. Before anybody invests in any investment project they actually should know all the basic facts about themselves. These are:

  1. What is their net worth? i.e. what is the net value of assets after deducting all liabilities such as family home mortgage, investment mortgages, personal loans, credit cards and overdrafts?
  2. What is their personal cashflow likely to be in the coming year and up to five years from now?
  3. Does the investor have emergency cash available to them in the event of a personal crisis. For example, if an investor lost their job or their business suffered a major loss or closed up how many months cash would they have to hand to meet monthly family expenses such as the basics of food, clothing and mortgage and not forgetting, in some cases, private school fees if that is also relevant.
  4. How much income tax and capital gains tax are they likely to incur not only in the coming year but also into the future?
  5. What way is the entirety of their investment portfolio set up and not just the way that a particular or intended investment asset is arranged – what asset classes, economic sectors, currencies and countries are investment funds applied to? Are the assets in low, medium or high risk positions?
  6. What level of liquidity exists within the investor’s holding so that if they needed to move to another opportunity can they do so or are they either tied to a fixed term if already invested or likely to be tied to a fixed term if they needed to consider a new investment?

The question then that investors need to ask themselves is whether their funds are sufficient to meet the goals of themselves and their family? If yes, can the level of risk taking with investments be reduced with a proportionate reduction in returns or is it the case that a greater level of investment return is needed with therefore a higher level of risk which needs to be taken.

In essence what is your “i” ? What is the rate of investment return that is needed to satisfy your personal goals? Investors need to understand themselves and their goals first as well as the effects of risk impacting on their lives before they even choose financial instruments to apply their money to.

Do you know your “I”?