Making smart choices with personal finances


Personal financial advice is all about you. You should take it very personally. No surprise that bankers or financial advisors ask you many questions before talking about the financial products to invest your money in.

Who are you as a financial investor? Do you know about the financial markets and types of investments? What is your time horizon? What stage of life are you in and what are your projects? These are things that you would only tell your best friend or a family member. So it is important to choose a trustworthy party to engage with, unless you want to do it all by yourself, studying the subject in books or online and following the financial news on a regular basis.

It may be wise to start with what the investment portfolio theory says: the more you diversify your investments, the less risk you run and the higher return you have over the longer term. Then there is the all too obvious ‘adagio’ of the stock markets: buy a stock when it is cheap, sell it when it is high. That is perfect if you had a crystal ball.

Timing is important when doing individual stock picking – it is much less so when you build a diversified portfolio over a certain period of time. But even then the content of the investment portfolio should be benchmarked regularly with the market situation and expectations. Just as much as it needs to be checked with your life stage, projects and investment horizon.

If we look at the financial markets today we see stock markets that have had a three-year ‘bull run’ after the crash in the wake of the worldwide financial and economic crisis that started in 2007. Companies have good profits and interest rates are very low, something not seen for many decades. Just like in the year 2000, we have multi-billion dollar takeover deals of companies we had never heard of a few years ago. One can wonder how they will make enough profit for the acquirer to warrant those high purchase prices. On the other hand, interest rates on savings accounts are very low. Not any easy situation to make much money without taking risks. But you should only take as much risk as your investor profile warrants you to do. If not, what is the difference between this and gambling? And gambling you may only do with a small amount of your savings, but you should never bet the house.

Another matter of importance when investing is liquidity. Your investment portfolio should be in line with your lifestyle, the monthly expenses you make as well as with your projects, such as building that dream house in three years’ time. All too often people are told to put money in an illiquid mutual fund or insurance product with a long time horizon, at a very remote retirement age. Later they find out that when money is needed to buy a house, it takes weeks or months to get out of the scheme and at a high cost.

Financial advice is a skill – either you do it on your own or you pay a professional to do it for you. The ideal financial advisor should be a trained and experienced professional who charges you for the advice he or she is giving you, not by taking commissions on the financial products you buy from or via him or her. This should make the planner unbiased and entirely focused on your interests. As a result, employees of banks are typically not independent financial advisors since they are often tied to the products of their employer, the bank. Nevertheless, these days some banks have a large variety of products on offer, including savings accounts. And a few of them even propose third party funds. Still they are not as independent as a true financial advisor, but substantially better than those ‘advisors’ who basically only offer a few financial products they are commissioned on. All in all, it is not an easy choice. Still doing it yourself requires a lot of studying and experience. You are not an architect or a builder overnight either. That is why most people hire an outside expert rather than doing it themselves.

There is one group of investors that are special. It is the business owners. Since they obviously believe in their own business and their personal capabilities to make handsome profits, they invest all their money there. That is very understandable, but business owners should be aware that they invest in an illiquid investment, that they have no diversification and a very long term horizon. It is one thing to build the business into a success, it is another one to sell it at a good price. Still wouldn’t we all like to replicate Marc Zuckerberg’s almost instant success with Facebook? Yes, but most of us will not succeed and should take more prudent and diversified investment options.

Know yourself and invest accordingly.