Published by Keith Corrigan, VP Business Development
As a financial advisory firm, we are often asked, “What is the best investment I can make?” The question seems simple, yet the answer varies for different professionals. A stock broker might have a few stock picks for you, in which he could earn a commission. He would be required for those recommendations to be suitable for you in this transaction, but is not beholden to the fiduciary standard.
In the world of financial advising, however, we act as fiduciaries to our clients. Investments must be both suitable and in our client’s best interest. This makes it important to understand the needs of the client, their unique stage and situation in life, what their long-term goals are and how this investment will fit into those plans. A stock tip is generally given to a speculator, or gambler, not an investor.
When we are in a strong bull market, such as we find ourselves in early 2018, almost anyone can pick a winner. Throw a dart at a list of possible stocks, and you would likely hit a name that will perform well over a short period of time. But, how many of you are willing to play roulette with your life savings?
Risks and Returns
So, how do you go about figuring out which investments are best for you right now? First, you have to understand how much risk you are willing to take. Generally speaking, the younger a person is and the fewer responsibilities they have (children for example), the more risk they are willing to take. Ask yourself these questions and be completely honest:
- How much do I expect my portfolio to grow over the next 10+ years?
- Am I more concerned about losing my money or having my investments gain in value?
- How would I describe my knowledge on investments and investing?
- If I had $100,000 I wanted to invest, how much of that am I willing to lose?
- How long will it be before I will need to start taking income from my investments?
Very few people are willing to risk it all. Most people have worked hard to earn the money they are going to invest. Because of that, they want to keep it. We would all love maximum returns with zero risk, but that just does not happen in the real world. Why is that? Maximum returns are often realized by investing in young companies who have a breakthrough product/service, but this is very complicated. Few of these companies start out raising capital by offering stock. Rather, they usually look for friends, family and angel investors to help fund their start-up. Because these are private, very few people know about them, the offering is not regulated (think about your buddy asking you for money to fund his latest and greatest idea) and the chances of success are very low.
According to Forbes, 80% of businesses fail within the first 18 months (1). Investing in this space is a huge risk because eight out of 10 of these investments will result in total loss. On the flip side, this is also the place where the biggest fortunes can be made, and it’s no wonder why it is dominated by the very wealthy; they can take the gamble because it represents only a small portion of their overall portfolio.
So, where are the deals for an average investor?
Think of these stats: Over 500,000 new businesses are launched each year. 8 of every 10 will normally fail within the first 18 months. Of all those start-up companies, only a few will become publically traded companies and issue stock that you can invest in. The “deals” are finding those companies who are well-managed, have great products/services and will survive in the long run.
Let’s look examine a typical public company. The first investors are often friends and family. This is typically a huge risk to the investors the product or service is largely unknown. Next comes their IPO and the share price would be rather low, often less than $10/share because at that time, not many people would believe it would become a solid, viable company. Maybe less risky than when it first started, but still risky. Today the stock could have appreciated nicely to over $1,000/share. We now recognize them as a solid company, and many would say it is a good investment.
At what point would you have been willing to invest in this company? It wasn’t until years after the IPO that the stock really started its quick climb. That could be almost 20 years after it began.
It is very difficult to spot companies who will make it through the long haul in a meaningful way. It takes a disciplined approach, and it is easy to get wrong. If you invest in the wrong company, you could lose money. The amount would depend on the size of the gamble you took. Considering this, for most people the best investments are in solid companies with good leadership, great strategy and disciplined processes.
How do I get started?
A great place to start is simply understanding your risk tolerance. You can take an online quiz that will assess your risk tolerance and provide a sample investment strategy by clicking here: https://client.gaamwealth.com/survey/?q0=undefined