Personal Finance 1.4.2016 01:25 pm

Why investing is like choosing a husband (or not)

Image courtesy stock.xchnge

Image courtesy stock.xchnge

My dad once said that when you weigh someone as a potential husband you should keep your eyes wide open.

After the wedding however, you should close them, he advised.

While he didn’t suggest that you should be blind to your spouse’s mistakes or that a marriage should not involve personal growth, the message was clear: be very careful who you get in bed with, but once you’ve tied the knot, don’t be too critical of someone’s shortcomings and accept them for who they are.

A lot of people get married with the idea that it would be a permanent relationship, but unfortunately a lot of marriages end in divorce. It is a very uncomfortable thing to live with: There are no guarantees.

You may do your utmost best to choose someone with a good value system and who, if you are lucky, may also be tall, dark and handsome with a great sense of humour to top it off, but life happens. The person you married may turn out to be someone completely different in twenty years’ time.

However, if you’ve done your homework (ie kept your eyes open before getting married), committed for the long haul and decided upfront that you would sort out your issues as they arise and don’t run for the divorce court at the first sign of trouble or once the honeymoon phase is over, you could save yourself a lot of unnecessary tears.

Of course, life is often much more complicated than this, and sometimes even having done your fair share of homework won’t be enough to ensure a long and happy relationship. Occasionally there may be no other option than divorce, but this shouldn’t discourage you from making an informed decision at the start.

In some sense, the investment process is similar. There are a lot of investments out there that offer excellent returns and that on first glance may be considered “tall, dark and handsome”. Look closer however, and you may find that there are huge risks associated with the investment, fees may be high or not disclosed properly or the returns could be too volatile for your particular risk appetite. In extreme cases you may even end up losing all your money.

What makes this evaluation process even more difficult, is the fact that the disclosure of investment terms and conditions may be completely inadequate to really make an informed decision. Similar to potential life partners, some investment firms are very good at hiding important information.

Recent research suggests that a lot of relationships fail because of unfulfilled expectations. You expect that he would share the homework or that she would chip in on the household expenses and if he/she doesn’t, the negative feelings start building. Had you and your spouse clearly communicated upfront what these expectations were, a lot of unhappiness could have been avoided.

It is similar with investments. You need to have a clear investment strategy and know why you are investing. This will make it a lot easier to stick it out when things get tough.

This is especially true during uncertain and volatile times where significant equity market moves in either direction, could lead you to make rash and irrational decisions that could have a detrimental impact on your wealth in the long run.

While there will be times where your personal circumstances may change and where you may need to adapt your investment strategy, short-term market volatility should not dictate your investment strategy.

Of course, just as with relationships, there are no guarantees.

Many Zimbabweans who were saving diligently for years saw their pensions reduced to almost nothing as a result of hyperinflation.

It is impossible to plan for every possibility, but jumping in uninformed, unprepared and with a naïve view that “everything will just work itself out”, increase the chances of an undesirable outcome that could have been avoided, in my view.

In an uncertain environment, one of the benefits investors have is the ability to diversify. (Unlike most marriages, you don’t have to choose just one investment and stick with it!)

Knowing that you have done your homework and that your portfolio is diversified in line with your long-term objectives will make it a lot easier to ride out turbulent times.

The sad reality is that when the chips are down, you will be the one who will need to live with the situation – not your trusted (co-investor) friend or financial advisor. If you’re a regular Moneyweb reader you’ll know all too well once the card houses start imploding, investors are often left out in the cold, having to fight court battles that can drag on for years with very little chance of recouping their money.

Open your eyes before making an investment.

If you’ve done your homework, it will be much easier to shut them thereafter.

 

 

 

 

 

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