DIY investing - it pays to be prepared
1 August 2007
By Tim Hewson
There are two very important words when it comes to investing in managed funds "buyer beware". It's your hard earned money you're investing, so a little preparation can go a long way towards giving you confidence in your choices.
On your marks, get set - research
Research. And when you're finished, research some more! Enough can't be said about spending the right amount of time looking for the right fund and the right provider. Have you mapped out your investment plan and are you happy with your risk profile?
Having the answers to these questions will definitely help when it comes to finding an organisation you're comfortable with. And one more thing - when you're up and running, make sure you take the time to conduct regular checks on your investments, so you know the objectives haven't changed.
First impressions - do they really count?
It's simply not enough to rely on the credibility of a big fund provider. If possible, familiarise yourself with the investment teams and get comfortable with their experience in managing particular investment strategies. After all you're paying these guys good money to manage your investments.
Risk - exactly how comfortable are you with it?
Having established your risk profile, it's important you understand what the fund invests in and the impact it may have upon your investment. Investors typically use managed funds to obtain all the benefits of professional management, diversification and accessing opportunities that would not otherwise be possible as an individual investor.
However, even though you have a firm understanding of your own risk threshold, always ask yourself this one very important question how comfortable will you be if things don't go your way?
There's no such thing as a free lunch
Since past performance is no indication of future performance, it's also important you understand how much investing in managed funds will cost you.
Different fund providers and funds usually charge varying fees depending upon the type of assets they manage and the sophistication of the strategy they use. Fund providers often charge management fees, performance fees, and administration fees and expect to be reimbursed for any other reasonable expenses. It's important to remember that any fees the fund provider charges, will ultimately be deducted from any profit you make.
Diversification - how far to spread yourself
Many investors follow the theory that rational investors use diversification to optimise their portfolios and determine how they should allocate their wealth. Having already mapped out your investment plan you'll have a return target, timeframe and an amount of money you are prepared to lose if it doesn't work out the way you intended. Make sure you keep to it.
One other golden rule about diversification don't diversify for diversification's sake. Diversify too much and you can water down your returns by spreading your investments too far and too thinly not to mention the additional fees you could be charged.
Are you regular?
Once you've chosen your time horizon, a technique known as 'dollar cost averaging' can build wealth and minimise risk over a period of time. Dollar cost averaging reduces risk and encourages you to make smaller, fixed investments at regular intervals over longer periods of time.
Ultimately, this lets you take advantage of variable price movements in the market, and lower the overall cost of your investment. However, keep in mind the golden rule - past performance is no indication of future performance.
One last thing - the all-revealing PDS
Finally, make sure you read the product disclosure statement (PDS) and seek financial advice if you still have questions. Your fund providers have worked hard to ensure this document contains all the information you need to make an informed decision. The difference between reading and not reading it could be the difference between sounding or not sounding like you know what you're talking about.
Happy investing.
About the author
 | Tim Hewson MA (UNSW)
Senior Manager - Investments and Managed Funds
International Direct Banking
Rabobank |
Tim joined Rabobank in February 2006 as the Director, Structures and Investments and as part of the Global Financial Markets business working extensively in the structured credit, interest rate and fund derivates and commodity-linked investment markets.
As part of Rabobank's RaboPlus team, he was responsible for the development, design and implementation of the uniquely innovative retail banking platform which provides Australian retail investors with access to a range of investments and managed funds.
Prior to joining Rabobank, Tim spent more than four years in the wealth management industry working for a specialist investment firm focused on structured credit investments, alternative investment strategies and structured product development.
Prior to his time in wealth management, Tim spent more than five years working in the Financial Markets at The Commonwealth Bank of Australia (CBA) in the credit and interest rate markets.
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Important note: Before making any financial or strategic decision you should obtain professional advice which takes into account your personal circumstances and objectives. This article is not professional advice and does not take into account your personal circumstances or objectives.
The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of Rabobank Australia Limited.