Liberty Newsletter September 2018 View the newsletter online

Past investment success does not determine future performance

By Carlo Gil, Liberty Financial Adviser

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You don’t have to look far to find negativity in the local and global investment landscape. When headlines like these hit the news, investors tend to panic, make drastic decisions and lose their shirts by taking significant losses. But, as the old saying goes: “Today’s newspaper is tomorrow’s waste paper.”

The same is also true for those hearing positive news from the investment market. When your friend makes money, it is usually the main topic of conversation at social events, creating a sense of envy in those who failed to spot the investment opportunity. This success spurs other into making drastic investment moves, buying into opportunities too late, after the gains have already been made.

The reality is that it is not enough to use past trends as a guarantee of future success. These trends can easily change, especially in a volatile money market. When you're investing money anywhere other than a fixed deposit account, there is no guarantee that the returns will be the same as it was in the past.

For example, when you look at the massive growth experienced by some cryptocurrencies in the recent past, the upsurge could not be sustained indefinitely. Inevitably, it results in losses for those who invested near the end of the growth trend.

How can you assess the actual potential for gains from an investment?

The first and most important aspect of spotting a good investment opportunity comes down to knowledge and education. As an investor, it’s important for you to conduct a thorough analysis of the different investment opportunities that you encounter on your journey to building wealth.

As a potential investor, you could, for example, review an equity fund by comparing the performance of similar equity funds from all the different competitors. Look at the funds’ fact sheets which should clearly outline the fundamental differences in past performance, costing and the size of the portfolios. This will bring forward the hard facts and create a detailed comparison.

This detailed comparison is also a great way to steer clear from confusing marketing messages. When assessing a potential investment, remember that every opportunity has particular advantages, which is what the marketing will focus on. However, there will also be disadvantages, which marketers will be less willing to publicise. An educated investor knows the pros and the cons, and can then make an informed choice.

Four ways to spot your next investment opportunity

1. The timing of your investment: Did other investors (boasting about gains) buy in when the market price was low and then cash in that investment when the price was higher? If you invested when your friend sold, you would then be buying in at a higher price, making it harder for you to make a profit.
2. Understand the investment terms: How much money would you need to invest and would you need to add more money to the investment over time in order to achieve the past investment returns? These are just some of the factors that influence your investment returns.
3. Is the past growth sustainable? Just because investors made money last year doesn’t mean that you’ll continue to make money over the next five years. An investment that’s showing slow growth this year, may boom over the next five years. Market trends, economic conditions and investor confidence, all play a role in assessing potential investment returns.
4. Professional advice and mentorship: By submerging yourself in the details of the investment opportunity, you can often find yourself too close or unable to make an informed investment decision. This is why new and experienced investors should seek professional advice before committing to the opportunity.

Working with a professional adviser or broker will also help you to increase your knowledge and empower you to make informed decisions and realise better gains over the long-term. A financial adviser or broker doesn’t only have a wealth of knowledge, but also has deeper insights from their experiences within different markets.

Remember: You can seek the advice of more than one adviser – it’s not cheating but increasing your chance of investment success by leveraging off their understanding of different investment markets.

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The information contained in this communication, including attachments, is not to be construed as advice in terms of the financial advisery and Intermediary Services Act of 2002 ("FAIS") as the writer is neither an appointed representative of Liberty, nor a licensed financial services provider as contemplated in FAIS. Please consult your financial adviser should you require advice of a financial nature and/or intermediary services.