Why You Should Ignore Expert Advice When It Comes To Investing

Recently while reading the Sunday papers I came across an article which contained summary views from a number of financial advisers and investment managers on what readers should be investing in going forward. The article was typical of what usually appears in the printed media at every year end/January with a view to what investors should be doing over the coming year.

On reflection, this type of article occurs throughout the year with perhaps more subtle commentary depending on the then current investment conditions. This, of course, is not unique to Ireland and happens in every country throughout the world. Everyone wants to know what the experts think and how one can take shortcuts in making money.

There is a saying that those who can, do. Those who can’t, teach. While this is extremely unfair to those in the education sector, the principle when it comes to advising others about monetary matters boils back down to the fact that if you could be so sure of your investment outlook why would you share it with others? Just say nothing, take your own money, put it into the markets and make yourself a fortune. There would be no need to have clients. All one would have to do is just make money for oneself.

The truth, however, is that nobody actually knows what the future holds in any sphere of life. Otherwise we would all have crystal balls and be heading to the bookies to make money. Even the really smart investors such as Warren Buffett and Anthony Bolton had their own fair share of poor stock choices and these individuals were a rare breed out-thinking, more than most, markets over a longer term but rarely, if ever, getting it right in the short term.

Then why is it that such commentators can get coverage so easily? Partly because such pieces help to give readers a variety of financial perspectives and partly because everyone is, at heart, a little greedy and wants to find out what they might be missing out on. In recent time the Celtic Tiger showed up Irish greed in property and contracts for difference by people who could afford neither the expenditure nor the risk. Further back in history one can find similar greed a la the Dot Com Bubble, the USA Savings & Loans Crisis, the South Sea Bubble and even the Tulip Bulb collapse. Add in the many con-artist schemes that attract the “suckers” and it is easy to see how greed can be exploited.

This avarice is also evidenced by the public focus on investment performance league tables of unit funds. Investment companies, in turn, make hay out of highlighting their top of the table status in order to promote their funds. When they underperform they sidestep the issue by explaining that their funds are primed for growth in the near future when some different circumstances may arise.

So what is an investor to do?

One aspect that all reasonable and experienced investment advisers will agree on is that broad diversification will assist in smoothing out volatility in performance of individual assets or asset classes, while time will assist on recovery of underperforming assets provided that they have not been overly encumbered by borrowings.

This approach has been proven to be enhanced by the process of rebalancing individual portfolios. In this respect it is interesting to see that some Irish investment companies are now promoting this process as the new way forward when, in fact, it has been an acknowledged approach for decades.

The key for personal investors, however, is to match risk with reward or more specifically define what reward is needed before taking risk. Over a long advisory career I have seen many investors let greed get the better of them in pursuance of higher returns than those needed to achieve their personal objectives. These objectives, quite often, amounted to merely having sufficient funds in their old age to enjoy a quality life. By compromising the objective with higher risk, many have fallen short of their eventual needs and in some cases wiped out a lifetime of earnings from hard work.

In a nutshell, any investor should start by ignoring the experts. Figure out what is important to you and your family’s future and then work with a financial planner who is capable of determining what investment performance is needed. Then and only then, should you start by constructing an appropriate investment portfolio while at the same time bearing in mind that no adviser or fund manager is the font of all knowledge.

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