With the volatility of markets always a talking point, Gary Connolly gives five ideas to novice investors before taking an investment leap.
So, you are thinking of investing some money in the markets? Obviously it is advisable to talk to a financial adviser who can talk you through the minutiae of the process and talk about the pitfalls and possible hazards.
However, there are five things to remember and keep uppermost in your mind before taking the investment plunge:
- The importance of planning
- Thinking long term
- Don’t be greedy
- Don’t try and pick the winners
- The dangers of feeling too safe
“A goal without a plan is just a wish”
In order to avoid common mistakes that can derail their progress, investors need to define their goals clearly. It is also important to be realistic about how these goals are going to be achieved. Without a plan, investors can be tempted to build a portfolio based on temporary factors such as recent performance and this can lead to very expensive consequences. A basic plan will include specific, attainable expectations about how much to invest and also the regularity of monitoring. Keeping an eye, on a regular basis, on your investments will allow you to see any warning signs long before a crash and burn.
“You’ll make better decisions once you start thinking long-term rather than short-term.”
Realistically, the long term is not where life is lived. The long term is made up of a series of short terms. Plenty of investors commit to investing for a ten-year period, but behave as though this is made up of 20 six-month periods. To get to the long term, it is important that you survive all of these short-term periods along the way. A long-term investment is most definitely a commitment so be aware of that at the very beginning.
Gordon Gekko is a dangerous role model: Greed is most definitely not good
Remember the property bubble… well it was not the first time that a bubble has caused people distress. Consider the case of the 17th century genius Sir Isaac Newton who got burned in the South Sea Bubble. Newton was fortunate enough to get into the South Sea Company early. Having made a quick killing, he got out, but then had to suffer the ignominy of watching his friends get really rich, as markets continued to sky rocket. He eventually succumbed to the pressure, got back in and to make up for lost time, re-entered with a lot more money. The market collapsed and he was totally wiped out. This is what is supposed to have given rise to the now famous saying, “I can calculate the motions of heavenly bodies but not the madness of men.”
Greed is your enemy. It is exceedingly tempting, though terribly dangerous to become embroiled in a market as it continues to inflate. A more measured approach to investing may cause you to give up on some profitable opportunities, but it is important to remember the mouse that went cheeseless, was the mouse that got away.
Buying the haystack and not the needle
We all remember the stocks we ruefully never bought – the Ryanairs, the Paddy Powers, Googles and Apples, of this world. There are always the shoulda-coulda-woulda portfolio which is crammed full of stocks that experienced an exceptional rise over the last number of years, in which many of us were a guilty bystander.
When the overall market does well, it is because of a handful of winners. In fact about 7% of stocks are extreme winners and these drive the returns of the overall markets. Now seriously, what are the odds that all the stocks you buy will be in that 7%? So why bother trying? In fact, you shouldn’t try to guess your way or pick your favourite stock with a pin, it is important that you diversify and buy stocks across the overall market.
The Peltzman Effect and Investing
In America the law introducing compulsory wearing of seat belts was introduced in the 1960s as the country was experiencing mounting casualties on public roads and highways. In 1975, an economist from the University of Chicago, Samuel Peltzman, published a very controversial article with a shocking conclusion; contrary to what was expected, the introduction of the law did not reduce the total number of deaths. There was a decline in driver deaths, but this was almost entirely offset by an increase in pedestrian deaths.
Once you tell people that cars are safer, they will drive faster and more recklessly. And this is exactly what happened. Car drivers adapted in an unproductive way, rendering the intended effect of the regulation redundant.
With investing, if you believe markets to be safe, for a given level of return, you will invest more into it. But what if the perceived level of safety is greater than it is in reality? Think about credit rating agencies during the financial crisis – providing ratings that in hindsight were far too high, and promoting complacency.
It is important to remember that investing is a tool for building wealth and is not only exclusive to the wealthy. Anyone can get started on an investing program and by following expert advice, it can yield dividends. What differentiates investing from gambling is that it takes time – it is most definitely not a get-rich-quick scheme.
Warning: Past performance is not a reliable guide to future performance
Gary Connolly is Managing Director of iCubed, promoting better investment outcomes through a collaborative approach to investing. He can be contacted at gary@iCubed.ie or on Twitter (@gconno1). iCubed Training, Research and Consulting, trading as iCubed, is regulated by the Central Bank of Ireland.