The headlines said it all…
‘Investors lose millions in Detroit property fund‘.
It’s a classic story of a trusted advisor getting an investment strategy wrong. It happens!
But in the case of the lost Motown millions, there is another story and it is one that Irish investors suffer from; lack of understanding of diversification.
Lack of diversification
A number of studies, including those by MoneyWhizz and Standard and Poors reveal that the Irish public has poor financial literacy skills and difficulty when it comes to risk diversification and the impact of inflation.
In the case of the shrinking millions in the Motown property market, the Irish public lost millions because their investment strategy was simply too focused in property. Sound investing begins with having the ability to contain and manage risk. Property by its very nature is and will always be a HIGH RISK INVESTMENT for a variety of reasons, not least, the fact it requires very large capital outlays and can be near-impossible to sell in a down market. In the case of the Detroit market, other factors were probably also at play but regardless of what those may have been, investing in one single asset class is generally not a recipe for long term success…unless the investors are extremely lucky!
Investing on blind faith
Another mistake investors can often make is investing on blind faith. This occurs when the investors are led to believe in a form of cult of personality. In other words, they invest without even the smallest level of financial knowledge and instead take a leap of faith in an individual or company hoping that a public profile will somehow protect them against significant losses; it rarely does. In fact, there is much evidence that proves the most successful ‘active’ fund managers cannot outperform ‘passive’ investors over time. And this is where there is a wide spread of risk, in small-cap and other fund asset classes. Property by it’s nature is a high-risk asset class that can destroy investor value for years, or worse, forever!
There are some basic rules all investors should follow to ensure they protect their money:
- Avoid investing on blind faith.
- Ensure they understand the risk of the investment.
- Seek diversification (minimise the risk).
- Minimise the TER / OCF (Total Expense Ratio / Ongoing Charges Figure.
- Take a long-term approach.
- Be humble – quiz advisers when they use jargon and become familiar with investment terminology.
- Be prepared to pay for independent investment advice (or analysis).
- Seek re-balancing options (it can ensure risk is managed effectively).
- Invest time to understand markets where they have investments.
- Forget loyalty and be prepared to switch advisers.
Building personal wealth is a long-term challenge. In order to be successful, investors must put their needs first. They must also be informed, patient and prepared to accept their only loyalty must be to their financial well-being. When it comes to their advisers, unless they can prove their value and earn their keep, like a poorly performing asset class, investors must be prepared to dump them!