During my career as a financial planner, I must have seen just about every type of investor there was. There were investors that preferred property, investors that preferred only stocks and investors that chose safety over all else, and stuck with cash. Oh, and absolutely everything in between.
Now it certainly didn’t take me long to learn that every investor had their own ideas and it was very difficult trying to change them. Why, because those ideas were shaped over lifetimes by many influences. It may have been parents or friends, a TV show, or by reading various investment books and magazines. And of course the incredible amount of financial information available online. This blog is an obvious example of the high quality available! (Yes, blowing my own trumpet!)
Anyway, there are any numbers of sources that can, and do, influence an investor when they’re making financial decisions. But in doing so, most of the information and advice investors look at tends to concentrate solely on particular assets. Rarely, if ever, do they examine how the particular asset actually helps to achieve their overall investment plan. In other words, lots of investment assets are bought solely on their performance history rather than as a complementary addition to a portfolio.
This lack of investment/investor cohesion always creates’ ad hoc’ investment portfolios that always struggles to satisfy your investment goals. I have literally seen hundreds of clients who have regretted terribly, various investment decisions they’ve made. And mostly they were purchased during an equities or property boom, commonly at the tail end.
Buying of an investment asset without any thought to your investment objectives is a pretty reckless approach to risking money.
The Key to building an Investment Portfolio
So the key to building a long term investment portfolio is to understand exactly why you are building the portfolio. If you can do that, the process of selecting the best and most appropriate assets suddenly becomes a ‘cinch’. Whether it’s an ETF’, a stock, managed fund or property, each of your selections should be chosen with careful consideration to your investment goals. It is vitally important to make sure you have these established before you decide to enter the market.
As a financial adviser for many years, I’ve certainly been in the position to view countless investment decisions made by people. For example, an investor might prefer residential property when deciding to invest. And generally, they would state a ‘comfortable retirement’, as their overall purpose for entering the property market.
But dig any deeper (and I have) and you’ll discover most of these investors; had no idea how their selected property will actually do the job. They really struggled to show how it actually fitted the bill to create ‘a comfortable retirement’. It was quite obvious they had done only the most cursory of research and relied mostly on their real estate agent for direction. This is a rather dubious source of independent advice if ever there was one! Surely such a large capital outlay requires a bit more consideration than, “I’m doing it for retirement!”
Alternately, there were clients who would offer capital growth as their prime purpose to invest. But will add in the same breath, how the investment property’s rental income will also be fantastic for their retirement.
Now if it is capital growth that’s required, shouldn’t there also be a plan on how and when the growth is to be realised via selling the asset. If the asset does indeed perform as expected, why on earth would you want to retain it? In other words, this investor will wait 20 years to grow the value of their asset, only to keep it for another 20 years. Doh!
Interestingly on average, property usually has a yield* similar to cash investments, but with far greater risk. (Look at the bottom of the post to see how a property’s yield can be calculated.)
So for example, as an investor who is after capital growth, your asset selection would be determined by factors that can reasonably be calculated to fulfil this objective. If it is an investment property you prefer you might look for,
- A region/suburb with a history of strong growth,
- Situated in a consistently sought after suburb i.e. close to a city.
- Have a purchase price below the selected locations median price
On the other hand, when an investor wants a property for the purpose of income they would be considering factors that produce income, such as,
- Low ongoing maintenance costs and effort
- Located within close proximity to pools of renters i.e. hospitals, military establishments
- Close to amenities and services allowing a rental premium to be charged
- Lower purchase price in country areas but higher rental yield.
The above are just examples of the type of key attributes you may want in a particular investment. But remember, there is no one size fits all. Of course, if you select shares as your investment the exact same process is applied.
Just make certain to decide on your key selection criteria before embarking on purchasing your investment. Think long and hard about what you are trying to achieve and decide how particular assets are going to do it.
ou should always list the specific asset criteria you believe is required, to achieve your investment objective. An investor who fails to do this chooses any asset and will wonder why it didn’t work out!
One of the best examples of a real lack of purpose happened when I was visited once by some new clients, a husband, and wife. They came to my office carrying a large folder filled with papers and assorted documents.
After the usual small talk, they proceeded to give me a detailed description of their financial position. As I remember, it went something like this.
They had, in addition to owning their home, three investment properties, all of which were negatively geared. A share portfolio comprising various Governments floats as well as selections from the mining, banking, and retail sectors. A varied array of cash investments, some in term deposits and the rest at ‘call’. Four super/retirement funds with the possibility of another two, presuming they could find the paperwork.
And finally, just for good measure, they also produced a spreadsheet of their salaries and expenses, three years of tax returns and a complete list of their insurance policies.
So, after listening patiently, they finally arrived at the crux of the meeting and asked
“We just want to know if we are doing the right thing.”
Now, I must say their question was a common one, as I was often asked for consideration of someone’s financial situation. But this time it was being asked by a couple who obviously had the ability to amass a formidable asset base. Yet here they were, asking me if they were doing the right thing?
The couple obviously didn’t have the slightest inkling of why they were investing? They had spent the best part of 15 years building a portfolio of various assets but they couldn’t seem to enunciate why on earth they had done it.
They totally lacked any objective other than the vague notion of accumulating assets.
For example, if retirement was their end goal did they have the answers to what was planned for the investment properties? Were they to be sold and the proceeds placed in tax-efficient retirement income streams? If they were to be kept, what was the estimated income stream minus the outgoings, could they expect?
Were they building in a ‘plan B’ of alternative sources of income just in case their tenants vacated? There were so many issues they had failed to address, yet on the surface, they seemed the epitome of the switched on investment savvy couple. Never judge a book by its cover I suppose.
So how can you improve your investing?
A good way to start when you want to be an investor
There are numerous advertisements claiming to give you investment success. From the most dubious of schemes right up to beautifully packaged financially engineered products. Begin by ignoring them all. The results of a company’s marketing efforts should have no place when deciding on your potential investments.
Rather, a prudent investor uses their own filters and screens when deciding on potential investment candidates. Remember it is you seeking opportunity, rather than a financial institution reminding you of their products through an advertising message.
And yes, those property seminars, with the beautiful slide presentations, promises of unbridled capital growth and free cups of tea, need to be the first casualty. Keep well and truly away from these ‘traps’.
I have long held the belief that “investments should only be bought by you; they should never be sold to you.” So decide on what it is you want the potential investment to achieve. Create a clear description of the features you feel are important, and then go and look for it.
An Investor always starts with a plan
Investing is a strategy rather than a goal. It is used to achieve a predetermined outcome. If there is no desired outcome for the investment then there is no point in going through all the rigmarole and risks associated with doing it. Always start any investing with a clear objective and build an investment plan around the achievement of this objective.
Spend some time deciding on what your objectives are. Ask yourself what reasons am I investing. Be quite specific so that you can select investment assets based on how they will achieve that objective. You should have a long time frame, so make sure you use it. Forget about the here and now and look only to the distant future. And if your 60 just remember your average lifespan is another 25 years!
As an Investor you need Research
Here you will need to compile both qualitative and quantitative data. Your quantitative examination requires historical figures, trends, macro environmental factors, Government legislation and all the other ‘stuff.’ You need to know your numbers. What has happened, what is happening and what is going to probably happen? Draw yourself a picture of numbers. Look at growth and income trends of your selected asset types. Both share and property markets amass huge amounts of analytical data, so dig deep. Check this post for more detail to help you.
But you also need to try and understand the qualitative factors driving particular markets. And make sure you get opinions from around your social circle and relatives. But it is not their recommendations you’re after but rather where they may have gone wrong. By learning from mistakes others make you can formulate a variety of coping strategies should the same type of events happen to you?
For example, would you believe that over my 25 years of advising, I discovered that 95% of people who owned investment properties preferred to buy them in their own suburb or the next one? They actually selected exclusively from a pool of properties based primarily on the proximity to their own home. Their number one selection criterion was being able to drive past it on the weekends!
Now I for one am the first to suggest this little ‘factoid’ has absolutely no basis incorrect research methodology. However, since it has been told to me consistently over 25 years by investors, it does suggest a huge flaw in some peoples investing process.
The concept of only buying local can be attributed to the popular notion that property investment is a “sure thing”. I’m sure you’ve heard discussions with your friends about property prices never going down. In fact, I was recently informed by a friend, an economics teacher, a most curious property observation.
He suggested that Sydney property prices were unique in that they never fell; rather, they just remained stable in weak market conditions. Fancy that, a trained economist suggesting not only something totally improbable but also totally impossible.
According to his ‘theory’, the standard, verifiable volatility of all markets has kindly decided to spare Sydney. Mmmm, I really don’t think so!
So with this strong ‘no lose on property’ concept ingrained into investors, it creates the perception that all suburbs provide similar results. Hence, why not purchase the investment near your home so it’s handy to drive past each Saturday!
Think carefully about location if you’re purchasing an investment property. If you limit your selection ‘space’ you’re limiting your returns.
So turn down the market ‘noise’, the friendly advice and the avalanche of expert opinion and select investments that you believe will have the greatest probability to achieve your objective. If you feel you lack any skills required to do this competently, go and get them. No one is born with an innate ability to invest – It is all learned.
The real trick to successful investing is to have a clearly defined objective and select your investments for the sole purpose of achieving that objective.
The great John Lennon once asked “how can I go forward when I don’t know which way I’m facing” Investors should be continuously asking themselves the very same question.
Thanks for reading, see you next time. Homepage
