It is fair to say that everyone is interested in making money. The problem for most investors is that it is not that straightforward. There are so many opportunities around that it can be just too difficult to understand them all.

Then there is the fear factor; fear of making a wrong decision and losing all our money. So most investors would simply leave the money in the bank rather than invest it in something they don’t understand, or something that seems too good to be true.

The bank is a safe haven and most people understand how a bank operates and trust it implicitly. The bank will pay interest to customers who have money deposited and the customers are happy. It is fair to say that the main reason people don’t be more active is because of fear and ignorance. That’s not necessarily the investor’s fault. Some people are more interested than others, some like to take risks, some don’t.

The truth is that although banks are solid institutions, bank interest rates have generally been unattractive compared with the returns to be gained elsewhere.

When taking a long term view there is no doubt that other investments will always outperform bank deposits. A serious consideration is an element known as the effect of inflation.

Most experts would agree that keeping all one’s money in a bank account is not the wisest thing to do. Over the long term we have inflation in our economy which causes prices to rise. Currently inflation is around 1.5% per year, which is not that high. However if an investor is only receiving 1% interest then the effect, in true terms, is that their cash is losing its buying power. Their cash should be earning in excess of 1.5% just to keep pace. Ideally one should look to beat inflation by a substantial amount to give a decent return.

There can be no doubt that investors should keep some cash fairly liquid (easily accessible) and a bank deposit is ideal for this purpose. The question then is how much should investors keep in cash. Again everyone will have a different view, but generally the equivalent of six months of usual expenditure should be kept available for emergencies. The rest should be invested in other ways.

Then that begs another question, “What things?”

Before going on to that there is a pertinent saying; ‘Never keep all you eggs in one basket’. This is a perfect truism and is so succinct. It is the most basic element in sound financial planning.

Don’t have all your money in stocks and shares – if the markets drop then you have lost money. Many investors in Hong Kong suffered through the Asian crisis in 1997/8 and the Dot com implosion in 2000 through too high an exposure to equities.

It should be a question of balance. Below is a simple chart showing how a sound financial plan can be successful using the concept of a pyramid, after all the Egyptians knew a thing or to about sound structures!

When assessing someone’s net worth or wealth we have to take account of all their assets (property of value).

This chart shows that the base must be strong. Therefore as property and cash are considered sound investments they are long term investments and they form the base. Retirement provision is also there as it will give long term security. At least 60% of one’s total wealth should be in these types of investment. Then there are medium term investments representing 30% and short term only 10%. Stocks and shares are considered short term even though some investors hold them for the long term.

Now one has established a sound financial base, what products does one look to invest in?

Before answering this, an investor must have some clear objectives as to what they want to achieve. So we have some fairly simple questions that will help set those objectives.

Is the money earmarked for a specific purpose e.g. Education Fees, property purchase,
car, and retirement provision?

When would there be a need to access some or all of the capital?

What return would you like to achieve on an annual basis?

What risks are you prepared to accept based on the chart below?

Risk Profile

1	Cash kept under the mattress	0%
2	Cash / Bank Deposits	1 – 5%
3	Bonds / Fixed Interest Securities etc	3 – 6%
4	High Yield Bonds / Debentures	5 – 7%
5	Guaranteed Funds / Hedge Funds / With Profits	7 – 12%
6	Collective Investment Funds (mutual funds)	?%
7	Equities – Mature Markets, Specialist funds	?%
8	Equities/ funds - Emerging Markets	?%
9	Options / Warrants / Futures	?%
10	Gambling – Macau	?%

This is a fairly simplistic guide but helps to categorize one’s attitude to risk.

A very important factor in trying to assess investment return is to understand the concept of each category. A major influence in an investment is time not timing. It should be understood that the investment world is fairly cyclical and can swing from growth to recession. As already stated, equities will always outperform bank interest rates over the medium term. The adage is very fitting and that is:

“Don’t put all your eggs in one basket”

The message from this simple but effective saying is to diversify into different areas. Generally not all investments behave in the same manner, by investing in a range of different investments it will significantly reduce the overall risk but will also give balance to a portfolio and more stable returns. Going back to our example of the pyramid, by diversifying your investments you gain stability. With this as an example then it is not unrealistic to invest money into more risky investments, so long as it is in relation to the overall picture. In this case why not buy some equities and hold for the long term. They will achieve growth in normal market conditions and give income through dividends.

We mentioned that time and not timing in the market will determine whether your portfolio is growing. By riding out the market volatility and fluctuations and relying on underlying growth then you will be successful. In essence it is more profitable to invest for the long term than to try and predict the fluctuations in price movements. Look at the following chart which shows how the FTSE All Share and S & P 500 indices have performed over the last 25 years and how some major events have not made much of an impact looking at the bigger picture. But look at an event in isolation then the markets were badly affected.

As humans we tend to make emotional decisions which, through experience, means that investors buy too high and sell too low. Professional managers are more analytical and work to mathematical models to buy and sell and can be dispassionate. A strategy is decided in advance and is rigidly adhered to. So even if a share has performed exceptionally well, if it has passed the sell level they sell it, not hold it to see how much further it rises. This then locks in the profit and the proceeds used to look for the next opportunity.

It is unlikely that you are a professional in financial services and looking for information and maybe even some help. By using professionals you can draw on their experience and ability to achieve the returns you seek. You can invest in opportunities that have historically been the domain of institutional investors (banks, pension funds, insurance companies and fund managers etc). The investment world has changed dramatically and this is likely to continue as more products become available, this can only be good for investors.

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