Over the past 10 years, equities have been the best performing asset class in only four years and rock bottom three times. Property was best three times, worst only once (although in the preceding seven years it was bottom three times!) Hedge Funds were best twice, but never bottom. Bonds were best once, worst twice. Cash was never best, but worst four times.
The lesson we could learn from this is that it is hard to predict which asset class will perform best in the coming years. Nonetheless many of us try to do this, and get severely burned in the process. Chasing last year's top performer can often lead to disaster.
Diversification
This is the surest way of reducing risk and ensuring smoother sailing in the choppy seas of investment. Making allocations to some, or even all of the above strategies is the best route for the average investor.
Personal circumstances will determine your allocation to the different asset classes. Everyone's circumstances will differ. Investing in order to maintain one's lifestyle in approaching retirement for example, is a different process and requires a completely different investment strategy to that for creating wealth. Those already in retirement need to consider life expectancy and ensure that they have achieved some growth on their investments.
Deciding what percentages to allocate to investment asset classes requires careful consideration of factors such as your time horizon, expectation of return, appetite for volatility and liquidity and income needs.
Some basic principles:
Set your goals understand what you are trying to achieve with each investment.
Understand your time horizons the less time you have to commit to your investment, the less risk you can afford to take. If you are investing for growth be prepared to allocate more to higher-risk asset classes, but be committed to six or seven years (which may need to be extended by two or three years due to internal and external factors).
Be realistic a conservative investment is not going to double in value every five years, an aggressive portfolio is not going to give you a smooth ride.
Be patient if you are taking a long-term view do not worry about short-term fluctuations in markets and currencies; they are a fact of investing. Keep your eye on the horizon.
Be proactive rebalance a portfolio if the percentages originally allocated to your chosen asset classes is out of kilter. This ensures you continually lock in profits of any asset class that has become too heavy due to good performance.
Get knowledge there is no longer any excuse for investors to claim they did not understand before renewing or making a new investment. Intermediaries are obliged in terms of the new Financial Advisory and Intermediary Services Act to make full disclosures on risk levels, charges, commissions etc to any potential investor. Make sure that you understand all the implications before you sign.
Look for security ensure you are with a branded organisation, critical if you are investing for income. If you are offered interest well above the going rate, beware. Many people have lost their life savings chasing that extra percent or two. But do shop around among the reputable branded companies. Because you have banked with one institution all your life does not mean you are getting the highest rate.
Shop around if you do not feel completely comfortable with any aspect of the advice you are getting, do not be afraid to consult someone else. Decisions you take now may be critical to your future. You need to feel totally confident that your financial planning is secure in your advisors hands.
Plan for tax and estate duty there are many ways to reduce these, and thus enhance the growth of your investments. If you can legally avoid sharing your wealth with the taxman, so much the better.
If you follow the above principles, you should be able to avoid many of the pitfalls that have befallen so many investors.
