Many investors lack the time, knowledge and experience to invest successfully, often encountering difficulties that could have been avoided had they taken advice from a good independent financial adviser (IFA) at the outset and continued to listen to their counsel over time.
While not every investor may need, want or be able to afford an adviser, it is worthwhile understanding that IFAs are more than just product pickers. They are independent of any service provider and their role is to assist with long-term financial planning. They play an important role in helping you make decisions that are right for your circumstances and, importantly, help you to avoid the pitfalls of investing on your own.
Of course, you do not need an adviser to help you avoid these common traps, but it certainly helps to be aware of what they are and how you can avoid them. These include:
1. Investing without a plan
If you do not know where you are going, how will you know when you get there? If you have some money to invest take the time to consider your goals and needs. Do you need to save for your child’s education? Do you need retirement savings? Answering these questions will help you get your plan going. A financial adviser can use his or her expertise to develop a long-term plan that meets your objectives.
2. Choosing the wrong investment product
The choice of investment products is mind-boggling. Different products suit different investment objectives; some have tax benefits and others have restrictions you should be aware of. For example, a retirement annuity fund allows you to save for retirement in a tax-efficient manner, but you can only access your money when you retire.
Remember to thoroughly research an investment before committing to it. An IFA can assist you in making choices suitable for your circumstances.
3. Not thinking about inflation
Time can erode the value of your money, leaving you able to buy less with the same amount of rands. This is called inflation. The returns on your investment should be at least enough to compensate you for the length of time that you invest so that the value of your money is maintained. Remember to bear this in mind.
4. ‘Blowing’ your retirement savings when you change jobs
If you are changing jobs, make sure you preserve the retirement savings you have built up. If you do not, you probably will not be able to retire with enough money to live on. If for example, at the age of 35 you choose to take your retirement savings in cash when you resign, as opposed to preserving it, you will have 40% less to live on when you retire. Put differently, assuming you will get 70% of your final salary (escalating at inflation) as a pension when you retire, your pension will run out 12 years earlier than if you had not taken your retirement savings in cash when you left your employer.
5. Focusing only on one market and one asset class
One of the keys to successful investing is diversification. In other words, do not have all your eggs in one basket. For example, in addition to South African investments, including offshore investments in your portfolio can help your savings grow, while lowering your risk. It also helps to understand how different asset classes (such as shares, bonds and property) can produce returns in different circumstances. Once again, do your research carefully, or talk to an IFA to make sure your investments are adequately diversified.
6. Acting on your emotions
Investors are particularly bad at picking the right times to buy or sell investments. In addition, they tend to switch between investments too often, destroying the value of their savings. An adviser can serve as a ‘voice of reason’, minimising doubt in volatile times, helping you to be rational rather than emotional about your investments, and encouraging you to avoid switching between investments for the wrong reasons.
Advisers help investors make sense of complexity and products available and in so doing, better equip them to match an investment to their needs and to react (or not) when things change. Most importantly, they help investors to manage themselves with discipline, identifying and understanding how their emotions can lead them astray in the investing process.
It is not impossible to invest on your own. However, an adviser has the objectivity and experience to help you meet the full range of challenges you might face.
Visit our ‘Find an independent financial adviser’ page to find an IFA in your area.