Investment planning challenges and choices

As the old saying goes, investing is simple but not easy. It is simple enough to pick a few shares of well-known global companies to hold in an online brokerage account. It is also simple to avoid this task by engaging a professional investor – such as a stockbroker or fund manager – to manage your money for you. Yet it is not easy to know whether the portfolio you build is sensible, the manager you have chosen is worth his or her salt, or that your pool of investments will be able to meet the goals that you are aiming to achieve. It is certainly not easy to stay calm and rational, when markets are soaring or in free-fall, as they will be from time to time.

It is not surprising that many of the new clients who come to us do so with a great sense of unease about their existing investments. This may be due to a bad experience or poor advice in the past, a sense of fear of what might happen in the markets to their hard-earned money, or simply a lingering doubt that how they are invested currently may be less than optimal. In some ways they are the lucky ones, as they have realised that their investment strategy needs fixing, and we can help. Many others are not so lucky, holding too much cash or taking risks they don’t understand in their portfolios, paying usurious costs on the investments they own, or chasing last year’s best performing markets and funds; all of which will be detrimental to their wealth. They stand to be disappointed by their investment experience, which is more than just a shame; it is unnecessary.

Start by building your investment compass

Investing money well requires a logical and robust framework on which to build a lifelong investment programme. It needs to be grounded in investment theory, supported by empirical evidence and enhanced with an insight into the behavioural traps and pitfalls that all investors face, that can and do cost them dear. We have spent considerable time researching the theory and the evidence to come up with an investment programme that we, and you, can fully believe in.

While many investors tend to start the process by thinking about what they should invest in, the true starting point should be to focus on how to invest. To do that we need to spend some time establishing the guiding principles and good investment practices that will underpin all the investment decisions that we will make together, now and in the future. Investing is a journey and these principles and practices act as a compass to steer us through the maze of choices, emotions and challenges that you (and we) will undoubtedly face, in the coming years. We call this our investment philosophy.

Our Investment Philosophy

Have faith and confidence in the investment markets

It seems hard to recall the boom days of the mid-2000s, when global growth was surging forward at such a pace that inflation was the big worry. The ‘credit crisis’ and the ensuing turmoil in the markets, followed by economic recession, ballooning government deficits and austerity – not forgetting Greece, the Euro crisis, Trump, Brexit and the COVID-19 pandemic – are far fresher in most people’s minds. It can sometimes even feel that capitalism is on its last legs, or at least struggling for credibility. There is much talk of the iniquitous gap between rich and poor and an endless stream of statistics about the fact that 1% of the world’s population hold 50% of the world’s wealth, which cannot be denied, but that misses the point. Capitalism is an adaptive, robust economic system that has delivered incredible developments to the benefit of mankind.

Accept that risk and return go hand-in-hand

One of the inescapable truths of investing is that to achieve higher returns, you have to take on more risk. That seems logical enough, but you would be surprised just how many investors seem to think that it is possible to get high returns with low risk.

Let the markets do the heavy lifting

In investing, there are two main sources of potential returns. The first is the return that comes from the markets and the second is the return generated through an investor’s skill. Those less familiar with investing are prone to make a few understandable assumptions that simplify the choices and challenges that they face. Perhaps the biggest assumption, and yet most misinformed, is that it is somehow simple – at least for a market professional – to use their skill to predict what is going to happen in the markets and position your portfolio appropriately. It seems reasonable that a professional should be able to decide when to scale back equity exposure or to start buying property, for example. This is simply not the case; the broad empirical evidence recording the poor performance of the majority of professional fund managers tells us so.

Be patient – think long-term

One of the great challenges that all investors face is that there is no easy or quick way to investment success. Aesop’s fable of the tortoise and the hare is a useful metaphor. You have to use the time on your side – which could be over multiple decades – to capture the returns of the markets effectively, but slowly. In the short term, market returns can be disappointing, and at times distressingly so – and on occasion exceptionally exciting – but always remember that you are playing a long-term game. It is time that allows the attributes that you seek to come to the fore. The longer you can hold for, the more likely the returns you will receive will.

Be disciplined

Patience and discipline are close bed fellows. Once you realise that to generate good long-term returns takes time, patience and belief in the markets, it is essential to put in place the discipline to stop yourself succumbing to impatience and ill-discipline. Discipline comes in many forms: sticking to the principles above; constructing well-researched and tested portfolios that should weather all investment seasons relatively well; not chasing investments that have gone up dramatically, but sticking with the logical reasons for not owning them in the first place; and the discipline to not become despondent about short-term, unimportant market noise, and abandoning – or at least being tempted to abandon – your long-term strategy. be at worst survivable, and hopefully far more palatable. It is time that allows small returns to compound into large differences in outcome for the patient investor.

What should investment planning consider?

Investment planning should start with your goals. Lifestyle Financial Planning starts with the end in mind, so we’ve got a clear understand of what your investment plan needs to achieve. Investment planning should also start with your values too. Is there anything you wouldn’t like your money invested in? For example, some clients seek to avoid tobacco and alcohol and industries associated with fossil fuels.

Once we understand those things, we can create an investment plan that considers:

• Your risk and return appetite
• Your liquidity requirements
• The effects of inflation over time
• Taxation considerations, including capital gains tax
• Which investment structure should be used
• Why asset classes should be used and their mix
• Which investments should be used, and
• Investment and asset class reviews and adjustments.

How can we help you with investment planning advice?

Alphington Private Wealth Financial Advisers can help you work out how investing sits within your Lifestyle Financial Plan and how it works along side your superannuation effectively too.

We will help you:

• Identify your goals.
• Review your income and cashflow requirements.
• Identify what assets and investments will help you achieve your goals.
• Present to you an investment plan, as part of your financial plan.
• Work with you over time to review your progress and adjust as necessary.

To make an appointment, call us on 03 9038 9449 (Melbourne) or 08 8318 6099 (Adelaide) during business hours. Alternatively, complete the contact form and a member of our team will reach out to you to make an appointment for you. We can meet face to face in our offices, and in capital cities. Video meetings are also available.