#HowToInvestWell Stage Four - Research
When it comes to investing these days, it can be difficult to see the wood from the trees....
Investors today have a plethora of information available, thousands of investments to choose from, as well as whole new breed of asset classes and business models which are relatively new.
In a competitive world where there is a limited amount of capital available to invest, investments products and services have become increasingly marketed to retail investors. It is liberating that an investor can take control of their finances, but it comes with risks attached. It is easy to be attracted to something that promises much, without full consideration of the downsides. An investment should only get you capital if you you truly understand it.
Every week in the weekend papers there are tales of woe from private investors following an investment that went wrong. This can be down to a number of factors, however, all too often the narrative is that they didn't do enough of their own research and which led to significant financial loss.
In the old days, investing was a relatively simple choice between cash, bonds and equities. It was often focused on a few key markets and a defined number of companies. Information was relatively slow and therefore there could be an advantage in doing thorough research on a company. It's fair to say that private investors could still make bad decisions, but there were fewer choices back then.
Back then, the stockbroker was king and most private investors flocked to them for advice and ideas of what to invest in and when to buy and sell.
Then came institutional products and securities which were aimed to provide more flexibility for professional fund managers. These have filtered there way through to retail investors and now almost anyone could start trading complex investments with very little training.
It was the advent of investment funds, where individuals can pool their money with other investors, which gave retail investors a simpler way of managing both small and large amounts of money. They grew in popularity in the 80s and 90s and there are now thousands to choose from.
Finally the rise of passive investments, which are linked to the performance of a specific market or asset have provided new ways of investing and greater flexibility.
So what's changed?
Before the Millennium brought the internet and technology to the fore, a lot of research was done using face to face meetings and paper reports. A skilled investor like Warren Buffett could outperform by investing in a small number of high quality stocks, bought at a reasonable price and held for a long time.
This change has created new ways of investing, like platforms where you can invest in a wide range of investment types. It has also created new challenges, as it can be difficult to know what is right for you.
This doesn't mean you shouldn't try to manage part of your money, however, markets move quickly and are globally connected. Just look at recent examples of the markets experiencing a "flash crash". It is therefore important to factor in your ability to spend time researching and keeping track of developments.
It is sensible to start with an understanding of what you want from your money and what risk and return you are willing to accept along the way. By having a defined set of criteria, it allows you to focus on what it is you are looking for and quickly identify whether a particular investment is right for you.
Jack of all trades
When it comes to investing, it is important to understand that even professional investors cannot cover every market and region. Many professional fund managers have an ethos where they know where there expertise are and work with others to fill in the gaps. It is the same in business - bring in experts where you are weak.
The art of good research is knowing your subject and applying a consistent approach to researching and reviewing opportunities, as well as your existing investments. I have outlined so of the key ways of structuring your research below:
- Set up a reliable sources of news and information - Being informed is a valuable tool when markets move quickly
- Apply a structure and process to your research - Consistency will provide you with a better chance of success
- Know your subject - Do not try to be an expert in every area, instead focus on knowing a few areas well that you enjoy working on and where you can add value
- Outsource where appropriate - Like any undertaking, it is often advisable to use specialists in certain areas where there is a benefit in doing so
- Set reasonable expectations for what the investment will do - Don't focus on target prices or defined outcomes, be flexible and take profits where prudent
- Don't invest in anything you don't understand - If you cannot explain the nature of the investment simply and understand the risk and return, you should probably avoid investing
- Avoid the value trap - There is normally a reason that an investment has gone down in value and it is a sign of further risk.
- Quality, not quantity - You should be comfortable holding an investment for many years, as this will give you the best opportunity to maximise your return
- Make sure the investment(s) are liquid - Ensure you understand how quickly you can access your money, as some assets can have unforeseen risks in times of market stress.
- Select a manageable number of investments - It is important that any investment
- Review your existing investments regularly
With good research and a sensible strategy, you can take control of your investments.
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