Conservative Investors Sleep WellConservative Investors Sleep Well is the title of a book written in 1975 by Philip Fisher, guru of growth investment. It was the follow up to his investment classic - Common Stocks and Uncommon Profits from 1957. I bought my copy back in 2000 and to my shame I am only now reading it. I can recommend it highly. The books relate entirely to investment in common stocks and shares. But, that is not what I am going to write about. I was inspired partly by the title and partly by a client I have been assisting of late. Something I come across with surprising regularity is individuals who have taken massive investment risks without knowing it. Should I ask anyone I meet how they view themselves relative to the risks that they are willing to take, almost all say low or moderate. I have so far only met one person who replied 'high!'. It just does not happen. You work hard for your money, why take unecessary risks? One of the areas that people seem to take these risks is with investment selection, or asset allocation as we call it in the trade. Seemingly normal people who tell me they don't like taking 'chances' will have 100,000 held in direct shares. Or own five mortgaged properties. Or worse... There are many different asset classes to choose from. Property and shares are just two. It isn't that I want to pick on people that own property. Far from it. I just want to highlight other options. But for the sake of this example, I am going to stick with property. As we all know, in most of the developed world, in the past ten years or so, property has been a superb investment. I don't think that it would be an overstatement to say that property has been THE investment. If you have borrowed the majority of the money needed to buy, your small percentage deposit has multiplied many times. You have done brilliantly. Congratulations. However, all that borrowing puts your finances under considerable risk. What would happen if a tenant moved out and at just the same time, you were made redundant? Far fetched? Perhaps. But not impossible by any stretch. Suddenly you are left with your own residential mortgage and an investment property mortgage to pay with no income to do it from. I don't think I need to labour the point here. But what might that do to the person who owns several properties? All investments carry some form of risk. That is the point. If you decide to concentrate on just one form of investment (a policy sure to result in either bigger profits or bigger losses) then you multiply that risk. But rather than spreading the risk, you take more of the same. Sure, two properties could result in bigger profits, but if it goes wrong, double the losses too. How risky are your finances? If everything you own is held on deposit in a bank account, might a little extra risk be prudent? If however, you are 'all in' technology shares on the Nasdaq, have you considered something a little more mundane? Below is a list (not exhaustive by any measure and in no particular order) of asset classes open to the individual. How weighted towards one or two are you? Might a little balancing be worthwhile? Investment property Specialist managed funds Unit and Investment trusts Corporate and Government bonds Cash on deposit Hard assets (coins, gold, silver, etc) Shares (in quoted or Limited companies) Antiques and collectables Life Assurance Hedge Funds Currencies If you look at your own finances, a great place to start is an emergency fund. This is exactly what it sounds like. Money sat in the bank in case you need access to cash instantly for something. Perhaps you suddenly need a new car, or you fall ill and can buy your way to quicker medical care by using private doctors. Whatever it may be, lets hope you don't need it! The financial services industry recommends that this 'fund' should be the equivalent of three to six months wages. Have you done this? It really is the most basic of preparations and yet so few have this buffer to fall back on. What next? If you have spare money each month after your living costs, will you need access to it in the short term? If you do not, perhaps you should be making some savings into a relatively low risk pooled investment. By this, I mean a unit or investment trust (commonly known as a mutual fund too). There are about as many funds available as you can possibly imagine. Onshore, offshore, in different asset classes, currencies, themes and markets. Choosing a core of three or four funds, each with a different risk/reward profile and differing investment objectives would be a good way forward. From there, save into each fund regularily, month in - month out. If you have chosen funds at least moderately well and given the matter some thought, time and compounding will do the rest. At this point, perhaps property might be another avenue. It is possible to buy investment property relatively conservatively. The financing needs to be sound, the local property market stable, the property well selected and any tenants need to be reliable. Many people own a residential property for their and their family's use. At retirement, having a second property owned free and clear and providing a regular income to supplement any pension would be very useful. Personally, I feel it would be unwise to base any retirement plans solely on the income from just one property. However, if it is a highly rentable property, it might, perhaps be enough. Either way, owning property outright is better than not owning property... However, buying property with short term goals is just speculation. You might be able to buy at a favourable price or find a distressed property to 'turn around', but really you are just gambling. It may be a sure thing (and hopefully is) but if you gamble enough, sooner or later you will lose. The point here is that most people take out a mortgage to buy a property. If your sure thing isn't, you now have two mortgages to support. As I say, sound financing, market research and a well thought out plan is key. Something I see all the time is direct ownership in shares. On any scale of assessing investment risks, owning shares will be towards the 'high' end of the scale. Buying shares directly should be amongst the last things you look to do. Yet, for many, it is the first thing they attempt and often with a minimal understanding of the risks being taken. With time and an aversion to the financial pages, a 'buy and hold' strategy will quickly become a 'buy and try to forget that ever I bought that dud' embarrassment. As a rule, the stock market isn't a place for the faint of heart. If everybody could trade and invest with a midas like touch, why would investment banks pay such huge sums to those city folk? Why would those same banks demand such high calibre staff? How skewed is your financial picture? How much risk have you taken (are taking) with your finances? Will your investments help you to achieve your goals? (Do you have goals?) If not, can they be put back on track to suit your needs? Though this was not the point of the book, I am sure you can now understand why the title, Conservative Investors Sleep Well, became so famous. * This was published in June 2004 * To read more investment related articles, please also visit:
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