Wanting, hoping & wishing for more money is something we all do and at some point in our lives it can and does happen; from a win on the lottery to an inheritance, pay rise or gift the next question is always: what to do next? Will it be spend, spend – holidays, cars – or should it be save, save, save. Devil or angel? Your heart or your head? However, does it have to be such a stark choice – can you spend and still have enough to maintain a lifestyle without worry – of course so long as you remember two golden rules from the master himself, Warren Buffet: Rule one is “preservation of capital”, rule two “never forget rule one” They apply whether you decide to handle your financial affairs yourself or employ a professional. So what are the basic rules of investment and how do they work?
First you must understand yourself and, in particular, your view of risk. What does this mean? It means being honest with yourself and how you view both money itself and risk. Your values and beliefs about these will have been established at a very young age, primarily via your parents and those closest to you. If your view of high risk is to lose £100 in an investment decision, then I would suggest that you have a very low risk threshold. Alternatively if you are happy investing £250,000 in a new business venture and can sleep easily, then your risk threshold is high. Both views of course, have to be measured against your overall wealth. You can establish your own “risk profile” by completing any of free online personality tests such as those found at www.similarminds.com. If you decide to use a professional adviser this is the first thing he or she will try to establish. Put simply, they will try to understand the limit of your comfort zone where money is concerned, as well as your long term financial goals and objectives.
Many of the financial markets are extremely volatile, and prices can move significantly on a day to day basis. The US market for example is considerably more volatile than the UK market. For example, a share in the FTSE 100 can move up to 10p in a day whereas a share in the equivalent American market can move one dollar or more (60p) – i.e. 6 times as much per day. You’ve now taken the test and spoken to the experts what next? What will be the key to your success? Diversification or, put more simply, spreading it around will be key, because that is what the successful boys, and increasingly girls, do. It is simple common sense – you do not put all your eggs in one basket as this is asking for trouble. If you had £100,000 to invest, you might put 15% into shares, 10% in premium bonds, 25% in Government Bonds, and the rest into property. Most millionaires are risk averse, they just manage their risk better by preserving their capital, diversifying to spread the risk, and using sound money management techniques. Perhaps this is why they are millionaires!! Just watch Dragons Den and see how careful they are.
Once you have established your risk profile, and accepted that in order to increase the value of what you have it will be necessary to trade and invest, what markets or investments should you choose? Property, pensions, shares, bonds, unit trusts, options, derivatives, precious metals, currency, the list is endless. It all sounds very complicated and intimidating. In fact it doesn’t have to be. There is no reason to feel threatened or intimidated because by asking simple direct questions everything can be explained very easily and in a non patronising way. Remember this is your money and these are your dreams; never, ever invest in anything you do feel comfortable with or fully understand. If it can’t be explained clearly and simply or it keeps you awake at night, you shouldn’t be in it!!