Why You Shouldn’t Believe the Man in the Pub!
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Ten Myths About Investment
The recession is forever in the headlines. You'd be forgiven for thinking that there is no hope for your savings and financial planning, but you'd be wrong. Every Tom, Dick and Harry in our local pub has their own theories about how to keep your hard-earned safe from the grip of the shrinking economy. Not surprisingly, few of these theories are right for everyone - some of them might not be right for anyone! - although many of the ideas have been around for years.
I thought I'd take the opportunity to suggest why these ideas might not be right for you, depending on your circumstances.
I thought I'd take the opportunity to suggest why these ideas might not be right for you, depending on your circumstances.
10 Common Myths
Ten Common Myths About Investment, and Why You Shouldn't Believe the Man in the Pub!
The Author
Graham Bond is a fully accredited and qualified financial adviser, based in Bristol in the UK. You can find out more about his services at the website of his company, Consilium.
The opinions expressed here are general, and are not intended to constitute advice for any individual. For best financial advice, speak directly to a qualified financial adviser to discuss your own unique circumstances.
Graham Bond is a fully accredited and qualified financial adviser, based in Bristol in the UK. You can find out more about his services at the website of his company, Consilium.
The opinions expressed here are general, and are not intended to constitute advice for any individual. For best financial advice, speak directly to a qualified financial adviser to discuss your own unique circumstances.
Equities are a good long term bet
Whilst it is true to say over the long term equities have outperformed most other forms of investments, the quote does not necessarily hold true over the last ten years. The FTSE 100 at the end of July 1999 stood at 6373 in comparison to 4232 as at Mid July 2009 (a -34% return). Most investors need to take a broad investment approach and not limit themselves to one type of investment asset.
A diverse spread of investments means I am able to take more risk
This common myth has been evident over the last two years. All forms of investment carry a greater or lesser degree of risk. Even investing into cash carries a degree of risk. The global banking crisis has demonstrated this problem. Inflation can also eat into the purchasing power of cash based deposits if the return achieved is less than inflation. A diverse portfolio may reduce the volatility of your portfolio, but it can never eliminate risk.
Experienced investors know where the market is going
Even the most talented investors can get it wrong from time to time. Many fund managers have made predictions over the last few years, and have been proven wrong. Even the Government and the Bank of England have shown that their predictions can sometimes be wide of the mark.
If it was easy to forecast what was going to happen to markets, then we would all be rich. Always bear in mind that even the most experienced investors sometimes get it wrong.
If it was easy to forecast what was going to happen to markets, then we would all be rich. Always bear in mind that even the most experienced investors sometimes get it wrong.
Past performance of investments is a guide to the future
Although the past performance of an investment shows a track record of the investment return over a period of time, it does not give an indication how it will perform in the future.
Many factors such as economic conditions, a change in fund manager, and change to the funds makeup can have a dramatic impact in term of future fund performance.
Many factors such as economic conditions, a change in fund manager, and change to the funds makeup can have a dramatic impact in term of future fund performance.
I should run with the latest investment recommendation
This myth is rooted into the investors' psyche, demonstrating the difficulty of separating the emotional and logical aspects of investing. All too often investors take into account the herd mentality and the fear of missing out on potential investment returns. In its most simplistic form, investors often follow the recommendations of other investors such as family and friends. Media and a general feel of well being can also affect investor's decisions.
Although this approach may work in the short term it will usually end in failure.
Avoid if possible recommendations from family friends and media as it is usually too late to consider investing. If everyone is positive about a particular type of investment, there is no one left to buy if better news comes along, but plenty of investors to sell if things take a turn for the worse. If invertors suddenly start to become risk adverse, then the value of an investment can drop rapidly as investors seek safe havens.
Although this approach may work in the short term it will usually end in failure.
Avoid if possible recommendations from family friends and media as it is usually too late to consider investing. If everyone is positive about a particular type of investment, there is no one left to buy if better news comes along, but plenty of investors to sell if things take a turn for the worse. If invertors suddenly start to become risk adverse, then the value of an investment can drop rapidly as investors seek safe havens.
BRIC funds are the investments for the future
BRIC stands for Brazil, Russia, India and China and refer to emerging market economies. It is true that BRIC economies are developing at a faster pace than developed economies such as the USA, and Europe. However, you need to look long term. The massive drop in Russia and Chinese share prices over the last few months demonstrates the level of risk associated with investing in developing economies. Again a diverse portfolio is the best long term approach.
Property responds differently to other investments
The last two years have demonstrated that property can be as unpredictable as any other form of investment. The average UK house price has dropped by 15% over the last two years to mid 2009. Many Buy to let investors have felt the pain of seeing their investments reduce in value over this period.
A diverse investment portfolio may not stop the value of your investment falling, but it might reduce the volatility of your investment.
A diverse investment portfolio may not stop the value of your investment falling, but it might reduce the volatility of your investment.
Gold is the best investment in a recession
Traditionally gold was used by investors as a safe haven when markets are volatile.
Investors need to take into account that gold is tradable and the value can go down as well as up. In early February2009, an ounce of gold traded at $995 an ounce, however in April 09 the lowest price was ÂŁ813 an ounce. Gold historically has not benefited from a recession as people buy less jewellery, industry uses less gold and struggling economies sell reserves to raise finance.
Investors need to take into account that gold is tradable and the value can go down as well as up. In early February2009, an ounce of gold traded at $995 an ounce, however in April 09 the lowest price was ÂŁ813 an ounce. Gold historically has not benefited from a recession as people buy less jewellery, industry uses less gold and struggling economies sell reserves to raise finance.
Offshore investing is only available to clients with large amounts of money
This myth may have been true fifteen to twenty years ago. Many investors now have access to competitively priced offshore investments that can be used as part of a wider tax planning approach. Investors still need to be aware of their attitude towards investing, the jurisdiction the product is regulated within and the type of proposed investment.
Is Taxation the most important aspect when making an investment decision?
Although Tax considerations should always be taken into account, they are not necessarily the most important factor when making an investment decision. An investors' attitude to risk must be taken into account. In the past many tax advantageous schemes such as film partnerships have been classed as high risk and in some cases the Inland Revenue has challenged their validity.
Is Taxation the most important aspect when making an investment decision?
Although Tax considerations should always be taken into account, they are not necessarily the most important factor when making an investment decision. An investors' attitude to risk must be taken into account. In the past many tax advantageous schemes such as film partnerships have been classed as high risk and in some cases the Inland Revenue has challenged their validity.
Pound cost averaging improves my investment returns
Pound cost averaging is a proven technique to slowly drip feed into an investment over a period of time. The aim is to reduce investment volatility when markets are in a state of instability. There is nothing wrong with the strategy, but it does not necessarily guarantee higher investment return's long term.
With pound cost averaging, an investor will buy more units or shares when the price is low and fewer when the price is high. That serves you well.
However, if you are a long term investor (I.e. more than ten years) you need to take into account that markets generally rise more than they fall. If you have a lump sum to invest, might be better off investing the entire amount if markets are low rather than using the pound cost averaging method over a long period of time.
With pound cost averaging, an investor will buy more units or shares when the price is low and fewer when the price is high. That serves you well.
However, if you are a long term investor (I.e. more than ten years) you need to take into account that markets generally rise more than they fall. If you have a lump sum to invest, might be better off investing the entire amount if markets are low rather than using the pound cost averaging method over a long period of time.
Instead - How to get it right!
If you want to find out more about investments and how we can help you please visit our website www.consilium-ifa.co.uk.
If you are considering investing it is important to remember that the value of your investment and the income generated could fall as well as rise and that there is no guarantee you will get back more than you invested.
The content contained within this article should not be regarded as advice. No individual or company should act upon such information without receiving appropriate professional advice.
If you are considering investing it is important to remember that the value of your investment and the income generated could fall as well as rise and that there is no guarantee you will get back more than you invested.
The content contained within this article should not be regarded as advice. No individual or company should act upon such information without receiving appropriate professional advice.
The Consilium Blog
Financial Advice You Can Trust
Consilium Asset Management are Independent Financial Advisers based in Bristol.
We pride ourselves on the quality of the advice we give and the service we provide to our clients.
If you would like to find out more about us and the services we feel free to conact us or visit www.consilium-ifa.co.uk
We pride ourselves on the quality of the advice we give and the service we provide to our clients.
If you would like to find out more about us and the services we feel free to conact us or visit www.consilium-ifa.co.uk
Your Views
If you have any views about where people should consider investing, or about the opinions expressed here, why not let us know!
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Sojourn
Jul 14, 2009 @ 10:54 pm | delete
- Very helpful information. In such economic times there's both a need for more information like this fighting the more easily spread misinformation that fear seems to generate.
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RinchenChodron
Jul 14, 2009 @ 2:07 pm | delete
- Very interesting, I learned something.
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