With the development of internet sites dedicated to private investors, the flow of private bankers and brokers worldwide, there is a certain temptation by many people with savings or spare cash to ponder managing their own money. There has been a certain democratization of information and “knowledge” through the spread of specialized media, and more focused attention from conventional media.
This abundance of information and tools, from live quotes to online tutorials has increased the feeling with many private investors, that “it can be done”. A certain do it yourself culture, which permeated with the rise and fall of the internet stock mania, has pushed many into managing their own wealth, with minimal input from “experts”. My experience can be summed up with two main points: 1) If you don’t have the right psychological frame of mind, you are almost certainly doomed. I am referring here to a certain detachment from the process of running your own money, the ability not to get over engrossed or even obsessed with it. 2) Speculating is one thing, and growing your assets over time, to ensure a decent retirement is another diametrically opposed concept. Mixing the two is fatal; trust me.
So when you do decide to embark on managing your own money, here are a few traps you must try to slalom through. A word of caution, I do not possess the holy grail truth on how to do it, but I recommend that if you peruse this course, add to it a yearly consultation with a professional to see how well or poorly you are doing. My genuine preference is that you only manage a small portion of your assets and allocate the rest to a strong manager with a track record and tight governance.
- Think along your own time horizon, not what you hear from analysts: When you decide to save money, you must incorporate in your every move, your own future cash needs. You must position yourself through the proper mix of safety and risk, in a way that gives you a future cash generation that will match your needs. Investing ideally is done to save for retirement. Period. Anything else is speculation.
- Don’t invest in businesses you don’t understand. The famed investor Peter Lynch once recommended that people invest in businesses that they could explain to a ten year old. Anything else was deemed too risky. I could not agree more. If many had stopped to actually try to explain some of the companies that were formed in the late 1990s to a ten year old, the kid would have probably rushed back to the Playstation, confused and unamused.
- Don’t fall in love with any investment. Straight forward. You may like to buy the stock of a company whose products you love, but keep that out of the equation in your final decisions. Leave passion to your personal life. You need to analyse, coldly, and reassess frequently, what you have invested in.
- Diversify. It is key for financial survival to diversify along all layers of the process. Geographical and business line mix is crucial as this will cushion the diverging cycles across the investment world.
- These days, we are in what I consider to be a massive global liquidity and aggressive risk taking environment. This from a technical perspective is worrying. In fact, we are probably at he cusp of a rapid decline across most asset classes, especially commodities and stocks. So staying on the defensive is probably called for and this for at least the next two years. What this means is that if you are managing your own money, this is a time to stay nimble with a very high level of cash in your account.
- Never use leverage. There is no need to expand on this. I have seen, first hand that leveraged investing for private investors, i.e. borrowing money to invest is a recipe for an inevitable set of problems. Invest only the money that is really meant for that purpose, money you have and can afford to see fall in value intermittingly.
- Never try to play currencies, always hedge back into your base currency, most if not all your investments.
- Always remember cyclicality. It is tough to gauge where you are in the cycle, but remember that cyclicality is the most powerful certainty in the financial world. So act accordingly and try to get out of the way when a strong down cycle is in force.
- Invest away from your own line of business. Many may disagree, but if you are in a certain secrtor, it makes sense to stray away, so that a downturn in that sector does hit you doubly. But rather than try to sift through and find good companies, a Herculean task, especially if you are not doing it for a living, I would urge you look at sectors and their position in the economic cycle, not specific companies. It is a simpler way to invest, simply put.
At the risk of oversimplifying, those broad “dont’s” ought to keep you in the game, but I need to end on one final disclaimer. Try to get at least periodic consultation, and try to begin your DIY experience with a small portion of your net assets, to test your ability to withstand mental and material hits.
