What Smart Investors Know and Do That Others Won’t

Many investors who approach their brokers or financial advisors are not quite clear about their financial investment goals. Recently, I was contacted by somebody who wanted my opinion about which stocks to buy and how to distribute wealth accordingly. In financial terms, this is called asset allocation. The guy told me that he has £3000 to buy shares. Before he started going on about how unpredictable financial markets are, I asked him a simple question.

“So, David what are your investment objectives?” I interjected.

“What investment objectives?” he asked as if he did not know that he was actually making an investment.

“If I could double or triple the money that would be great. I really need this money”, he frowned at me.

I realised that there were many things my friend did not cogitate well before deciding to invest his money. Firstly, I explained to him it will not be proper for me or any financial expert to give advice immediately because we do not know his risk tolerance. This is the most important aspect of the investment process because it determines the level of risk your are willing to take for a given financial investment. There are several factors that can affect your risk aversion. Somebody who has insurance policies can accommodate more financial risk than somebody who does not. Investors with families and dependants are more inclined to take less risk. After explaining these few points to him, my friend quickly jumped and said: “let me go and think this through”. This is a common mistake many investors do. Be wise and do not be part of the statistic. There are few things that every investor needs to keep in mind and are as follows:

  • Know the purpose of your investment to start off with.

It makes little sense to buy a bundle of securities without even knowing the purpose of the investment. What are you going to do with the returns of the investment? Is the money going to be used for a mortgage down payment? Or is the wealth generated for tuition fees for your child? Is a savings account the best option? This point is important because it determines how quickly you need the returns. Financial advisors will be in a better position to determine your risk tolerance based on how quickly you want to realise the returns.

  • Be specific with your investment objectives.

Many people are vague with what they want including their investment goals. Saying something like: “I want my investment to double or triple” will not help the financial advisor. State clearly what you want for instance, “I wish to invest £3000 in equity. I want 25% return after 2 years”. This goal is conceivable and achievable. Clear goals will also help us determine the level of risk you are willing to take to reach your goal. It will also be easy to monitor your portfolio performance based on your return expectations.

  • Financial Investments are all about risk.

It is very important to know that your returns will be largely determined by the level of risk your are willing to take. However, high risk investment does not necessarily guarantee high returns. There are other are factors that an investor has no control over such as the growth rate of the economy, inflation levels, depreciation of currencies (especially in offshore investments) and changes in government regulations (such as tax rate adjustments).

BIO

Mpho Bosupeng is a graduate in Finance and has keen interest in investment analysis. He is experienced in the insurance industry as a Financial Advisor. He has published books and numerous articles in academic journals.

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One comment

  • March 16, 2017 - 12:14 pm | Permalink

    i like where you say “double or triple” the money because that is what i used to say.
    Very enlightening

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