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Investments - the pros and cons
Firstly, an experiment. Open the money section of any of our newspapers. Isn’t it great - all those clever articles full of hot tips, investment fund rankings, explanations of how split-level with-profits turbocharged unit trusts are just the thing for you?
Now, count how many articles talk about portfolio management or asset allocation. You probably won’t even need the fingers of one hand. It’s possible that the phrases are unfamiliar to you. But here’s a quote from a hugely successful money manager: “My main job is asset allocation. That’s where the real money is made”. The man who said this was in charge of the investment accounts of Bill Gates and his family foundations. But what is he talking about?
I sometimes think that people in need of good investment advice might be better off reading the cookery pages, and studying their techniques, rather than trying to keep up with the countless articles in the financial pages.
Successful investing has nothing to do with picking this week's hot share or fund. Think about baking a cake. Having wonderful cherries isn’t much use if the flour is teeming with little insects. You need to make an investment cake in which the ingredients are good quality and, most importantly, don’t all behave in the same way. Some should be capable of going up in value if and when others are falling. The process of deciding how much of your money goes into each type of investment, at any given time, is called asset allocation.
Of course, you’ve heard this advice before - probably in another context. Simply put: Don’t put all your eggs in one basket. Good principles don’t change, and this one is true regardless of whatever the latest investing fashion is. Leaving property to one side, every portfolio should be a pot-pourri of shares, cash and other interest-gaining investments, and non-traditional investments such as hedge funds.
You should be aware that apart from bank accounts, each of these types of asset involves risk. For instance, shares, in the short term, tend to be riskier than government bonds, the flip side being that over the longer term they tend to make more money. The younger we are, the more risk we can take, because we have more time to recover any losses. So the proportion of riskier to not-so-risky assets should decrease the older we get. Ideally, when we’re retired and probably not topping up our accounts with fresh earnings, we should be taking on as near to zero risk as we can.
Choosing the exact ingredients, and deciding what proportion of our money should go into each one, isn’t easy – and the mix needs reviewing at regular intervals. Shop around for a good investment adviser; one who approaches your investments from a balanced portfolio viewpoint, and who takes into account your age and investment horizons, rather than just trying to seduce you into the latest hot offering. Remember that, apart perhaps from winning the lottery, get-rich-quick schemes don’t work. But with time, intelligence and some work, getting rich slowly but surely is possible for many of us. Just like making a good soufflé….
Written by John Andrews
* Dr John Andrews, a former managing director with the Man Group, is a consultant to the investment management industry and a non-executive director of Aspect Capital S.A. in Geneva
This article was created: 30 January 2007.
This article was last edited: 15 May 2007.
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