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| Adrian Mastracci, president of KCM Wealth Management, says “Make these principles your best friends. Invest prudently. Don’t let the ‘poof’ part happen to your savings." |
For Immediate Release
Vancouver, BC (March 21, 2005): Many investors have bet the farm on one investment, only to regret the decision big time. It happens all too often.
In the sage words of Mark Twain, “There are two times in a man's life when he should not speculate: when he can't afford it, and when he can”.
Adrian Mastracci, “fee-only” investment counsel at Vancouver’s KCM Wealth Management comments, “I empathize deeply with anyone who bets all the savings on one terrific investment, only to watch them evaporate into thin air. Quite often, the remaining investment value does not buy a latte at your favourite cafe. The aftermath typically means dramatic changes to one’s plans.”
That investment scenario is a very hard lesson to learn and accept. Nobody I know starts out wanting to lose the entire life savings. Especially, after one works diligently to accumulate the nestegg in the first place, or is in retirement.
However, the investment patch has served up a variety of such lessons. We are now dealing with the Portus fallout, a hedge fund in excess of $700 million. Another Florida hedge fund was in the news recently to the tune of US $300 million. Eron Mortgage was more than $200 million. The list goes on.
Sadly, I hasten to add, this scene will repeat itself again and again. I just don't know which investments are going to inflict the damage.
The good news is that much of this awful pain can be avoided. As simple as following a few easy commandments. It’s important for investors to be as knowledgeable as possible about investing.
The glorious reasons for placing all of one's savings into any one investment fills novels. However, I want to focus on the decision making process before the investment cheques are written.
I will summarize an approach to investing that can be adopted by all investors. Both the do it yourselfers and to those that seek guidance from others.
My approach consists of embracing five principles of investing. Here is the short list:
1. Diversify
First, and foremost, investing is about assembling a well diversified portfolio whose outcome does not hinge on any one investment. Thus, let’s be very clear. I do not care how rosy the prospects may seem for any investment. There is no reason to bet all, or substantially all, of one's savings on the fortunes of one horse.
Raise the red flag when a single investment, say a stock, becomes worth more than 5% of the portfolio. Placing one’s savings into one investment is not prudent. Most investors cannot afford the possibility of a major investment bet going sour.
2. Asset Mix
Asset mix decisions have the biggest impact on the portfolio outcome. The four major investment classes of assets are equities, fixed income, cash and real estate. One goal is to choose a sensible asset mix so that the holdings don't all move in the same direction.
3. Risk matters
Examine all your portfolio risks. Don't just get smitten by the upside potential of the investment. Unthinkable as it may seem, assess the possible downside of anything you are considering. The question is whether you can stand the reality of that wonderful investment becoming an absolute disaster. That’s right, your worst nightmare.
4. Some go poof
Accept the fact that some of those diversified investments can go poof and become terrible investments. Yes, even after a thorough assessment, and even with professional guidance. One more reason to ensure that no investment can adversely affect you in a significant way.
5. Fees and costs
Be familiar with all of the layers of investment fees and costs. Both the invoiced ones and those that you never see. Ask the tough questions of everyone you deal with as to what they and their companies are paid from the investment, both now and in the future. If you get fuzzy answers, your best interests may be better served by looking elsewhere.
These five principles form a considerable part of successful investing. Look upon them as five ounces of prevention.
The principles are not foolproof. They will not catch everything. Nevertheless, they do assist in reducing the disastrous mistakes that decimate portfolios.
Make these principles your best friends. Invest prudently. Don’t let the ‘poof’ part happen to your savings.
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