Bit of education can go a long way

Bruce Brammall, The West Australian, 11 November, 2019

A disturbing element of being a financial adviser is the financial horror stories you hear.

A new face starts talking about their current position. Sometimes truly ugly scars are unveiled that might, hopefully, be healing. Too often, it’s wounds still gushing body fluids.

Some make me angry, others sad. It annoys me how many involve a “trusted professional” who, if asked, I’m sure couldn’t spell “ethical”. Or lie straight in bed.

To a degree, you become desensitised. Almost all the stories repeat the same, usually highly avoidable, base mistakes.

Financial decisions emanate from one of two emotions – fear and greed.

Both emotions are generally healthy. They are motivating forces to get you TO DO SOMETHING about your finances. And that’s positive.

It’s what springs from fear and greed that cause the problems.

First, educate yourself a little

The most important thing when starting to invest is to understand each asset class.

There are only four – cash, fixed interest, property and shares. On their own, they are simple. But you need to get a base education on what each asset classes is, or get a professional to explain them.

If that person can’t explain each to you, in a way you understand, walk away. Each asset class has its place. Arguably, everyone should have a portion of each in their portfolio. (It’s just how much of each that becomes important, because each carries different risks.)

If someone only talks to you about one asset class, it’s generally that’s all they have to “sell”. Walk away. They are salesman, selling a product.

Be particularly careful if that asset class is property. Why? Because property is a big asset class, usually involving big borrowings. One mistake here can be utterly devastating.

Beware property developers, spruikers and seminars in particular. (That said, I love property and the right property can be a great vehicle for wealth creation.)

Listening to the wrong people

Don’t take advice from family/friends. Unless they are licensed advisers, they are probably guessing, even if you think they have more “knowledge” than you.

I love my mum, dearly. But her first investment recommendation, buying market darling sugar refiner, CSR, in 1987 was, truly, a dud. She meant well. And she got me interested in investing, which was invaluable. But I should have bought into an index fund with diversification.

Panic selling

Markets occasionally crap themselves. That’s what they do. Because the people behind them are also driven by fear and greed.

Succumbing to panic-based fear to sell is, usually, disastrous.

The biggest mistakes in history have usually been made to panic sell at a market bottom. Just because a market, or a company’s shares have fallen 10 or 20 per cent is not a reason, of itself, to sell. Does the investment still make sense?

Buying badly

This is tough, particularly for new investors, who don’t know good investments from bad.

Some should be easy to spot. Promises of “easy money”, anything offered by a property developer (yes, simply because, trust me, I do know better) or anything that lacks diversification.

Get some confidence. Put some wins on the board, by investing simply, through diversified investments. Then begin to think about some more concentrated, riskier, investments.

Not starting

This one is simple. Fear leading to paralysis. If you don’t start to invest, your journey of a million steps can’t begin.

“I don’t understand investment markets.” “I don’t know where to start.” “They keep changing the rules.”

Lazy. Defeatist. Rubbish.

Start small with something and add to it on a regular basis. Again, index-style investing is a great way to get going. Start with something you can afford and tip in $1000 (or whatever you can) a month.

Holding losers

I’ve heard w-a-a-a-ay too many stories of people who bought dud investments and then, no matter what, held on to them, waiting for them to turn a profit.

Particularly dud properties, or shares, that have fallen by 50 or 90 per cent. The investor refuses to sell, hoping they will come good one day.

Seriously. Generally, they won’t.

In most cases, you will be better off taking the hit, investing in better quality, more diversified, investment and adding to them over time.

Investing shouldn’t be tough. Get started. Minimise the chances of making losses, through diversification. Get help from professionals you can trust.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial advisor and mortgage broker. E: bruce@brucebrammallfinancial.com.au.