Sam’s Top Tips For Shaping An Investment Strategy

Investment isn’t easy, especially when there is so much noise, information, and ‘advice’  out there – with most delivered with a lot of conflicting information.

In fact, many people have preconceived notions about how to manage their money and investments, often based on their personal experiences or advice from well-meaning friends and family. This can be a minefield, however, and could end up costing you many thousands down the line. It only takes one or two small mistakes or miscalibrations over your investment career to cost you many thousands by the time you want to start drawing on it.

The ‘prize’ that you want to have your focus on, well before the pre-retirement stage, is to ensure that you do enjoy worry-free twilight years. Getting there means finding – and following – a way forward that suits your circumstances – rather than your next door neighbour’s. 

Here are some of the better tips that I’ve used over the years to lay the foundations for a sound investment strategy: 

Navigating market volatility? Start by taking a deep breath 

One of the common reactions to market volatility is the knee-jerk impulse to sell investments and move everything into cash. It’s understandable why people might do this (especially now when there are higher interest rates).

However, while this reaction is often driven by the understandable fear of losing money in a declining market, it is also the kind of short-term thinking that can undermine wealth-building potential.You want to get into investments for the long term. 

Markets go through cycles, and short-term fluctuations and periods of decline are normal. Selling when markets dip – even when the media headlines are predicting more – can mean missing out on potential future gains when markets rebound.

A good example of this is the last financial year, where volatility did mean that at times moving your investments to cash seemed like the safer move. But consider this: if you had done that at the start of the last financial year, you might have earned only a 2-4.5% return on your cash, while a diversified growth portfolio could have returned around 10-12%.

At this same time, when one asset is out of favour things can turn very quickly. Just look at bonds or fixed income, where we’ve seen some managers return upwards of 15-20% over the last year which not many people would have seen. 

Always look at the graphs that show years, not weeks or even months, when judging the performance of your investments.

Avoiding the “Shiny Object Syndrome”

Some investors are drawn to cryptocurrencies, unlisted investments, private equity, or startup ventures because they seem exciting and promising. If you play your cards right and have a good dose of luck on your side, these investments can yield substantial returns for some, but they are also associated with higher risks and greater uncertainty.

Cryptocurrencies are the current big shiny thing. Or, at least they were. Thanks to the market dynamics that almost redefine the definition of “volatility” and frequent crashes (with a “mega-crash” looming), the sheen has worn off crypto a bit. Nonetheless, there are people that remain intrigued by it and other “shinies.”

The basic rule is that you shouldn’t put any money into these speculative, “shiny and exciting” trends that you can’t afford to lose. They’re not quite gambling, but the parallels in their risk profiles are apt. 

For example, as people at various points in Australia’s history have learned the hard way, investing in schemes like abalone farms, forestry investments, or other tax-effective ventures can be counter-intuitive.

The abalone farming venture on Australia’s south west coast ultimately cost investors $59 million and taxpayers another $1.5 million – with those involved being jailed for fraud offences. This is not typical, and yet these stories are remarkably common.

Which also brings us to the next point.

Don’t let tax dominate your thinking 

Often interest in some of those ‘shiny objects’ can be driven by a desire to improve one’s tax position. Ultimately, many investors are concerned about minimising their tax liability, which is a valid concern, and certainly reducing the amount of tax you pay is a way to secure more wealth towards that retirement. 

However, it’s also possible to become so fixated on tax optimisation that you actually make suboptimal investment decisions. The key is to strike a balance between tax efficiency and maximising returns.

These were (or are) popular investments, not only because they were speculative and offered very high returns, but also because they allowed the investor to improve their tax position. The problem is that the way they do that is by incurring expenses that are deductible. For people that become too fixated on tax, this method requires incurring significant expenses for the sake of threshold optimisation, via an investment that significantly distorts a diversified wealth portfolio. Investors come for the tax deductions, and marginal improvements, but overlook the (often) high likelihood of failure, resulting in a loss to their total capital. 

In short, investment strategies that focus solely on tax optimisation, with considering fundamentals, are often the ones that have investors left in the dust. 

Always prioritise investments based on growth potential, income-producing ability, and overall suitability for your financial goals. If there are opportunities to optimise tax within that, then great.

Know thyself. Get very good at asset allocation and risk management.

One of the fundamental aspects of tailoring an investment strategy is determining the right asset allocation based on your very individual circumstances. This means you want to understand your risk tolerance, investment horizon, and financial objectives.

You do this by first deciding how much of your portfolio should be invested in different asset classes, such as stocks, bonds, and cash. It’s crucial to strike the right balance between these asset classes to manage risk effectively while aiming for your desired returns.

Understanding how each of these asset classes affects your overall risk exposure is the key to success here. Some investors are naturally more risk-averse and may prefer a more conservative portfolio with a higher allocation to bonds and cash. Others with a longer investment horizon and a higher risk tolerance may opt for a more aggressive portfolio with a greater allocation to stocks. 

Most worrying is that some people think their investments sit within a certain risk profile, but actually don’t.

It is critically important that you develop a true understanding of how to structure a portfolio around the various risk profiles.

But it’s also important that you don’t become too rigid in the process. Asset allocation should evolve over time to reflect changes in your financial situation and goals. For most people, this means that while they’re willing to play ball and take on a riskier portfolio earlier on, as they get closer to retirement, shifting to a more stable pool of wealth becomes a greater priority. Check in and keep your strategy aligned with your objectives. Having regular reviews with a financial advisor can help you make necessary adjustments to keep your strategy aligned with your objectives.

Finally, Think About Where You Get Your Information From 

There is so much information available, and increasingly, it’s noise. Have a think about where you get your information from. Is it social media? Water cooler talk? Family and friends at the BBQ? These can be useful starting points to hear about something for the first time, before going and properly researching and discussing it. However, if you’re basing investment decisions on these sources, you’re running the risk that, simply, it’s not good advice.

Cutting through that to find sound advice is getting ever more difficult, and the increasing prominence of AI isn’t going to help things. You may have seen the news about how one popular AI tool has gone from getting a simple maths problem right 98% of the time to now being right just 2% of the time. Imagine putting your faith in that for financial advice, and yet, there is research that shows that we a predisposed to trust in AI, when told that it’s an authority on something.

It truly is a reality that expert financial advisors play a crucial role in helping you to develop a tailored strategy that considers your unique circumstances, goals, and risk tolerance. Even in an era where information is abundant online and AI tools that promise expertise are freely available. Finding a financial advisor that you trust will help you skip the common pitfalls, steer clear of investments that seem too good to be true, and prioritise your long-term financial well-being.

Follow these tips and you’ll be one step closer to the retirement that you deserve, rather than a modest or even uncomfortable one that you’re pushed into because you got pulled into a bad investment or two along the way. That’s all it takes, and for most people, it can be avoided.

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