This is the third instalment of my “resolutions” posts, where I have promised to show you ways of saving yourself large amounts of money. This time I want to focus on investments and let me ask you two fundamental questions: –
- What are you paying your existing advisers/product providers on your existing savings/investments?
- What is the maximum LOSS your current investments could suffer and what is the maximum GAIN?
If you cannot answer these questions and/or if the answer is “I don’t know”, then please realise that this means you have no idea of how much your current investments are costing you and no real idea of the INVESTMENT RISK those investments are taking on your behalf.
I was encouraged to write a note around investment risk by a radio advertisement that I have been hearing recently, which promotes a particular Pension Product and speaks about the customer’s “inner investor”, suggesting that the opinions of the saver/investor should dictate the investment strategy of their “pension”. While, if the same saver/investor can demonstrate his/her investment skill and expertise, I would have no real problem with the ad’: my experience is that most investors/savers have little or no such expertise and, in such circumstances, I would argue their “opinion” is of limited (if any) real value. Indeed, I would go further to suggest that it may suit the advisers here to allow the saver/investor to make the investment choice, as later on this allows them to abdicate responsibility if the wrong choices are made.
Your “opinion” as to investment is not unimportant, but is it the ONLY issue to take into account? When working with my clients, I take them through a full Risk Analysis process, which looks at the investment being made from three vital perspectives: –
- Risk Tolerance – This is the part of the process that identifies your personal attitude to investment risk.
- Risk Need – This part of the process identifies the type of investment returns that are NEEDED to achieve your stated ambitions.
- Risk Capacity – The final part of the process identifies the losses you could suffer within your investment(s) and still achieve your stated ambitions.
NB: As you can see, if we evenly weight these three elements, choosing an investment based solely on your “inner investor” takes the first item into account and so you would be making a choice having completed just one-third of the appropriate preparation. This will typically lead to you choosing the WRONG investment and suffering because of that later on (this probably sounds familiar to many readers?).
The decisions you make around investment, be that investment inside or outside your pension, are likely to be some of the biggest and most important decisions of your life and, as such, they deserve to be given the appropriate amount of time. If you do not invest the time, then it is in “the lap of the Gods” whether you choose the right strategy or not. Unfortunately, for the investing public in the past, “the Gods” have not be too kind as recent HSE means testing of Ireland’s retired people has perfectly demonstrated. The most recent HSE means test found that 95% of Ireland’s over 70’s are too poor to pay for their own medical care, despite the fact that approximately 50% of these people had invested in some form of long-term investment/savings plan.
There is a huge difference between “making an investment” and being in possession of a properly structured “investment plan”. The former tends to simply mean you have been sold a generic financial product (a pension, a property syndicate, a basket of stocks & shares…etc.) at some stage in the past, the latter means you have put effort into identifying your investment NEEDS and then use realistic and appropriate assumptions to match appropriate investments to these needs.
Whether you are brand new to investment or whether you have been investing for many years, I suggest that ALL will benefit from a Personal Risk Review. Unfortunately, unbiased analysis is hard to come by in the financial marketplace, as the vast bulk of advisers in this space are “salesmen”; they are paid commission by the product manufacturer to SELL you that product. The type of in-depth and personalised analysis that I believe is vital to the success of any “investment plan” is ONLY available from fee based financial planners (like me) and I urge all of you to engage with such a professional as soon as possible. These advisers/planners will typically meet you without fee or commitment at first (so it will cost nothing but the time you spend to have the meeting) and will be able to tell you quite quickly if they can help you or not. They should confirm in writing the benefits they can deliver and the fee they will levy, which means that initial engagement will end with you having a “value for money” decision to make: i.e. will you pay the fee for the benefit promised? Last year I helped many investors perform such a review and all engagements ended with those clients paying far LESS for their investment plans, with the savings over time running into tens of thousands of Euro.
I cannot predict whether such savings are available to you, but what I can tell you is that you will never enjoy them at all unless and until you seek out a truly impartial planner and seek their help.
Paul A. Overy QFA, FLIA
