Don’t just invest and forget. If you’re an investor keep your eyes open and be prepared to ask questions. Watch out for warning signs that tell you something may be going wrong. Investment markets can be volatile, so review your plans regularly.
Savvy investors take the time to understand the basic principles of investing, then develop and stick to their investment plan based on the timeframe of each investment goal. Even when market and economic conditions are rapidly changing it’s vital that you keep a cool head as a knee-jerk reaction can often make things worse.
When market conditions change, it’s important to revisit your investments to assess whether they still fit your goals and risk tolerance. This will help clarify your position and will inform your next steps. Make decisions based on your long-term investment goals and what you think will happen in the future. Do not make a decision based on what has happened in the past, for example: ‘my investment has gone down 20 per cent’.
If your investments are still on track to meet your goals, then you will need a good reason to change.
However, if your investments are no longer on track, you have a tough decision. Should you change investments (and sell when prices are low) or hope that your investments will go up in value? It’s important to think carefully about your next step. If you are making your own buy and sell decisions, you may need to review and rebalance the investment mix to make sure it still matches your strategy and attitude to risk. If you are using a fund manager or financial adviser, discuss your options with them.
If you have used a margin loan to pay for your investments, you should check your loan account regularly because the value of your investment can change very quickly. As your investment is used to secure the loan, you should ensure that you can sell the investment and repay the loan, if market circumstances change.
When monitoring your investments, keep your goals and risk tolerance in mind. If your goals change, you may have to re-jig your strategies too. A change in your employment status or health may alter the risks you are prepared to take when investing.
However, there’s no guaranteed method to spot losses in advance. Even the most experienced investors make mistakes. Some typical warning signs that your investment may be heading downhill include:
Published statements: Sometimes ASIC and the Australian Securities Exchange (ASX) require issuers of investment products to publish statements clarifying or correcting information given to investors. The investment may still be suitable, but these warnings may signal that the investment involves more risk than you want to take. The problem may have been a genuine oversight but you need to be sure.
Accounting problems: Mistakes, delays, audit qualifications and controversy over accounts could be warning signs. Accounting rules can be complex and genuine errors or differences of view do occur. However, repeated issues may indicate deep-seated problems.
Management problems: Director and senior management in-fighting, resignations, breaches of the law or unethical conduct are sometimes warning signs. Changes in management may be necessary, but could take attention away from responsibilities to investors.
Repeated over-promising and under-delivery: While even the best managers make mistakes, ongoing disappointing results, lack of communication and falling service standards may indicate that something is seriously wrong.
Record keeping is an essential part of investing. You need records for accounting and tax purposes and to assess whether you need to make changes to your investment portfolio.
The world changes and so do you. That’s why successful investors review their plans regularly. The rule of thumb is to revisit your investment plan at least once a year.
E-mail ASIC with topics that interest you via ADFcolumn@asic.gov.au.
Australian Securities and Investments Commission