Be Your Own Investment Advisor

humagaia By humagaia, 11th Apr 2010 | Follow this author | RSS Feed | Short URL http://nut.bz/1jhfixpd/
Posted in Wikinut>Business>Investment

Nobody is better at knowing you and your requirements than you yourself. Utilise the KYC (Know Your Client) techniques to understand your attitude towards risk and return; whether you need to be an investor or are more inclined towards and capable of being a speculator. Understand the need for the use of techniques for minimising risk whilst maximising return.

You cannot employ anyone better than yourself to be your Investment Advisor.

It may surprise you to know that, over time, most so-called professional money managers do a consistently poor job with their clients' money.
Incredible as it may sound, academic research over many years has shown that throwing a dart at the stock market pages in your newspaper and investing in the stocks and shares that this action highlights, will prove to be more beneficial financially than leaving your financial future in the hands of most professionals. This includes Unit Trust Managers and Pension Fund Managers (the Funds often use professional Fund Managers within Stock Brokers to undertake financial investments on their behalf).
So, adding what you will learn henceforth to your own innate skills will almost certainly prove to be more monetarily beneficial. Add to that the substantial savings in management fees and commissions and you will obtain a win-win situation. What you save in fees can be invested to compound your income growth potential.

"Know Your Client" as an Investor - It's You!

First it is essential that you "Know Your Client". Well, since it is yourself, you may say that you already know yourself. You may know yourself, but it is unlikely that you know yourself as an investor. To know yourself as an investor you will have to ask yourself some basic questions and answer them honestly and to the best of your current capability.
If a successful professional investor were to be asked to describe the single most common failing in an investor just starting out in designing a personal investment strategy the most likely response would be "unrealistic expectations".
Stockbrokers probably see this the most. New investors plunge into the market with a "get rich quick" mentality usually at a time when stocks and shares have been increasing in value rapidly and they don't want to miss out on the opportunity. They hope to achieve that instant wealth that they think everyone else has achieved. They have fallen into the herd mentality and jump on the bandwagon. Unfortunately they are usually just too late. As the masses follow the herd then the investors get out (sell too soon!). Such people that follow the herd in this way are not investors at all but speculators. And like most speculators they lose more times than they win.
Conversely, experienced investors study carefully, using all the information at their disposal, the factors underlying any given investment. It is a considered approach. Time is not of the essence. Once all information has been processed a choice is made on the basis of which investment offers a satisfactory potential level of return at any given level of risk.
How do you ensure that you act as an investor and not as a speculator?
By using the appropriate techniques to maximise return and minimise risk.

The Concept of Risk

There was a time when keeping your money in a building society or bank savings account was relatively safe - even if it did not secure an exciting return. With the UK Government Bank Deposit Guarantee Scheme, if you have money deposited within a UK Bank, Building Society or Credit Union then the net balance up to £50,000 is secure.
Now suppose that you decide your investment strategy should be to extract your money from your account and invest it in the stock market in order to gain a higher return. You can check on the Internet to see how much better you would have done over the entire period that the stock exchange has been in existence. At no time has the return (basing a general investment on the stock exchange index) been lower than the return from a bank or building society. Of course, if you had been unlucky enough to choose the wrong shares (US viewers = stocks) or had speculated unwisely, then this situation could have been reversed.
Even the dramatic falls in all of the "crashes" did not put a stop to the overall rising trend seen throughout the Stock Exchanges history. Historically during these crashes the share prices dropped to levels seen in the not too distant past. It was the speculators that got burned, the investors just viewed it as a short-term blip in their long-term view of their investment strategy. At no time though did the average rate of return on shares fall anywhere near as low as the return that would have accrued in a building society or bank savings account. And that includes term savings investments.
Do not take these statements to mean that if you are risk averse that you should still invest in the stock market. There is another side to the coin: the question of risk. The higher the return the higher the risk.
If you deposited your money in an Icelandic Bank on the basis that they were offering a higher interest rate then you sacrificed, even though you may not have known it, the safety net of depositing it in a UK bank for the prospect of earning a greater amount of money in an offshore location. You must determine the possible downsides of that decision in order to determine whether you are comfortable with undertaking the action. So you see from this that everyone is an investor and should take the time to understand investments so that they are not burned by the decisions they make with their money.
Be aware that it is not a panacea that higher risk automatically guarantees a higher return. Far from it! Even in a "bull" (rising) market you may be unlucky enough to pick the wrong shares and lose money compared to a building society account. Opting for the riskier investment would not have produced a higher return - even though other investors, who chose alternative shares, might have succeeded.

Conclusion

Risk is always inextricably linked with return. The art and science of investing revolves around the techniques for minimising risk whilst maximising potential return.

Tags

Building Society Account, Bull Market, Client Money, Commissions, Darts, Get Rich Quick, Instant Wealth, Investment Advisor, Investors, Know Your Client, Kyc, Management Fees, Maximise Returns, Minimise Risk, Money, Money Manager, Newspaper, Professional, Return, Returns, Risk, Save Money, Skills, Speculators, Stock Market, Techniques, Unit Trusts, Unrealistic Expectations

Meet the author

author avatar humagaia
I am a grumpy old man with experience in many fields that I can write about including finance & investing, antiques & collecting, modern ceramics, software, books & education.& my grumps & gripes.

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