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Five investment basics every investor should be aware of

29 September 2014

Wealth managers are supposed to make their clients richer, while ensuring that their retirements are the best they could possibly be. (Their clients’ retirements, that is, not their own.)  This is, of course, our mission here at Global Index International, and one that we’ve been striving to deliver on for the past decade.

Sometimes, though, clients arrive on our doorstep who have not had the benefit of good advice previously, for various reasons. Often, we find that their money has been put into entirely the wrong kinds of investments; other times, it’s been invested in a riskier manner than we would ever have advised a client of ours to attempt, at least not without warning him or her of the potentially disastrous consequences.

As a result, we often put a lot of time and effort – not to mention company and personnel resources – into correcting these new clients’  poorly-  and riskily-set-up portfolios. Which is fine; in fact, it’s what we’re here for.

But recently we found ourselves wondering why it was that so few people seemed to be aware of a few basic investment rules that, while not enough by themselves to guarantee as good an outcome as a bespoke wealth management plan drawn up by, say, a Global Index adviser, would at least be sufficient to keep most investors out of some of the kinds of trouble far too many seem to end up in.

It is unbelievably easy to fall into the trap of putting too much of one’s assets into a single investment.

One reason, we thought, might be that many people are far too busy with their careers and families to devote the kind of time they’d need to become regular readers of the fat personal finance sections of major newspapers, or the myriad personal investment guidebooks that may be found any day of the week in bookstores and on Amazon. Investment advice, it seems, seems normally to be presented to people in large, complex chunks. Boiling it all down to a few practical, easy-to-understand points, without leaving out anything potentially major, is tricky.

We persevered, though. And so we are delighted to you present to you, our valued clients, with our Five Investment Basics.  

1. Diversify (to avoid “black swans” and other potential disasters)

One of the saddest things for any adviser is meeting a client for the first time who previously had invested all his savings in a fund or other investment entity that subsequently ran into trouble, and is now closed to redemptions, and worth only a fraction of what it was valued at the time the client’s investment was made.

It is unbelievably easy to fall into the trap of putting too much of one’s assets into a single investment. Friends and relatives, for example, can be extraordinarily persuasive, particularly if they’ve invested a large chunk of their own investible monies. (See Rule No. 2, below.)

But it’s incredibly risky, no matter how “safe” anyone tells you a particular investment is. As many investors found out in the wake of the 2008 global financial crisis, it is possible for things to happen that no one foresaw – what some experts have taken to calling a “Black Swan” event – which can cause even the safest of investments to fail.

Warren Buffett, the much admired octogenarian American investor, has observed that diversification is “protection against ignorance”. This may not sound like much of an endorsement, but in fact, it says it all – if you don’t know what you’re doing, diversification is your best bet.  

Many investment experts speak of an investment portfolio template comprised of five or six compartments, each of which represents a category of investment they refer to as asset classes.

Some will quibble about what the ideal percentages a typical retail investor ought to have in each of these compartments, and whether, for example, collectibles or gold stand on their own as asset classes, or should be lumped into the commodity asset class.

But the standard rule of thumb is that a well-diversified investor will have a percentage of his wealth in each of these categories: cash (including bank deposits and money market funds); equities; bonds; property; and commodities.

For those who enjoy them and are comfortable with the risk they can involve, collectibles can represent a further, optional asset class.

2. Enjoy your friends and relatives, old and new, but don’t take investment advice from them

Many of the “problem” investments we at Global Index International come across in our new clients’ portfolios were added on the advice of the investor’s friends or relatives, or so they tell us. It is easy to be persuaded by people you know and respect, particularly as you know they don’t stand to gain financially from your decision to heed their advice. And the fact that these friends or relatives have themselves invested in the entity in question lends enormous credibility to the case for it.

For some reason, friends and relatives often seem to favour certain types of speculative real estate developments; they also seem partial to small, relatively new companies with a single great idea.

We say: by all means take your friends’ and relatives’ advice on what to order for dessert; what type of wine to order with the meal; even, if you think they know what they’re talking about, where to go on holiday , or what kind of car to buy. But if they recommend an investment, don’t do it.

If you simply must, for reasons of family harmony, be seen to, part with no more than you can comfortably afford to lose – and assume as you write the cheque that you probably will.

And if you’re still struggling with the urge to join your Uncle Fred in that can’t fail investment that a friend of his is shopping around, try remembering this, one of the most important rules of investment of all: “If it seems too good to be true, it probably is.”

3. Make sure that whoever is selling you a product, investment fund, etc., knows your nationality, and, if applicable, the fact that you have a dual citizenship, US Green Card, etc.

Over and over, we and other advisers in the international space come across expatriates who are holding investments that are entirely inappropriate for their nationality and tax status. Americans in particular are vulnerable in this area, as few types of investment that are not specifically designed to accommodate Americans work for them.

What’s more, Americans who don’t know any better can find themselves hit with major tax penalties if the Internal Revenue Service takes issue with such investments, such as insurance products that aren’t designed for Americans. If you’re not sure whether an investment is acceptable to your local tax authorities, get expert advice. Do not take chances.   

4. Make sure you have a will, and that it is correct for your current residency/domicile situation, particularly if you have a family.

Even if your investment portfolio isn’t all that it should be, one of the first things you should do is make sure you’ve got a will in place. Otherwise, should you die suddenly, your beneficiaries could be forced to wait for the courts to agree on how your assets are to be distributed – and they might be distributed differently than you would wish them to be.

If the will was drafted before you moved abroad, it is essential that you have it checked out to ensure that the fact you are now living in another country won’t affect it – sometimes it can.

For example, if a British expatriate is domiciled for tax purposes outside the UK, and dies, this may matter, if the will is written as though he were still UK resident.

Another problematic situation can arise if a British expatriate living in a Sharia law country, such as the United Arab Emirates, dies without leaving a will. That’s because under the Sharia system, the deceased’s assets are normally transferred to his nearest living male relative, even if he is married. Even if there is a UK will in place when an expat dies in a Sharia law country, there is no guarantee that the wife will receive anything, experts note.

5. When beginning to work with a new adviser, insist on obtaining a document, signed by the person whom you will be dealing with at the company, which confirms key elements of the arrangement between the two of you.

At Global Index International, we have two such documents: The Client Confirmation Form, and the Client Protection Form.

The Client Confirmation Form confirms what the client was shown, and how he was told he could expect it to perform (for example, generating growth of between 5% and 7%).

The Client Protection Form sets out the terms of the arrangement between the adviser and the client, for future reference should the need arise.

 This article is intended to give readers a general understanding of the subject of longevity and how people should plan for their retirement. It is in no way to be taken as advice, which should be obtained from a reputable, regulated professional. Global Index International does not accept responsibility or liability for actions taken on the basis of what is written here.