I get many articles passed along my desk form a variety of different fund managers and insurance companies. This article is taken from a news release from Vanguard Investments that I’m sure you will find interesting as I did.

Lessons learned from a tough year

After a financial year that most investors would want to forget, a worthwhile exercise is to ask what has been learned.

Perhaps most crucially, investors have been unequivocally reminded during 2008-09 about why some of the most basic principles of sound investment practice make a lot of sense.

When the economy is strong and sharemarkets are rising, some of these straightforward principles are overlooked. And it can take a bear market and economic woes to bring them back into stark focus.

Here are just a few of the principles to be truly reinforced over the past 12 months:

Keep it simple. Many investors lost a lot of money in 2008-09 by being involved with complex investments that they could not really understand. If an investor can’t comprehend how an investment operates, the message often repeated by the likes of the Australian Securities & Investments Commission (ASIC) is clear: stay away from it.

Keep investment and personal debts under careful control. We have heard scores of extremely sad stories over the past year of older couples borrowing against the equity in their homes to invest in shares that were, in turn, heavily geared. This double-jeopardy approach to gearing truly exposed these investors to the full impact of the bear market. It provides an extreme lesson to all of us about the dangers of excessive debt.

Gearing works both ways. This ever-green lesson is linked to the previous point. The fallout from the bear market has been a telling reminder that while gearing can magnify gains in a rising market, it can do the opposite in a falling market.

Act your age. Many older and inexperienced investors were among the numerous investors who had become caught up with the euphoria of once-rising share prices and overlooked the need for the most-appropriate diversification of their overall investment portfolios. As good financial planners often remind their clients, the diversification of a portfolio should reflect an investor’s personal circumstances which include such factors as personal tolerance to risk, investment horizon, age, and expected years until retirement.
Look to the longer term. Particularly when the sharemarket becomes highly volatile, investors are vulnerable to over-reacting to day-to-day news and market commentary. Investors who concentrate on the longer term usually try to block out much of this daily “market noise”.

The 12 months ahead will set particular challenges for investors. Some cashed-up investors, who may be more optimistic about the prospects for share prices, may attempt to time their way back into the market – by trying to pick the best time to buy. Market timing is something that even seasoned investors rarely get right.

Financial planners often recommend that their clients “drip-feed” large amounts into the market progressively over an extended period rather than investing a large amount at one time. This is a form of dollar-cost-averaging.

Another challenge will be how investors react to the cutting back of the caps on concessional superannuation contributions – which include salary-sacrificed contributions as well as personally-deductible contributions by the self-employed and eligible investors without employer super support. The reduction in the caps may encourage some investors to increase their gearing of non-super investments without fully acknowledging the extra risks involved.

So, like I always say, make sure you know as much as you can about where your money is invested and research, research, research.

PD