Here follow steps 7, 8 & 9…
7. Don’t be greedy! Emotions drive irrational behavior – 2 of them are fear and greed. Don’t give in to either. If it sounds too good to be true it (probably) is! When considering the returns offered, measure them against inflation (aim for real returns – those which are in excess of inflation). Inflation is currntly (oficially) low and in a low inflationary environment, 20% per annum returns are not probable so be realistic in your expectations. Expect equities to beat inflation by 7-9% per annum oevr time and expect yoru pension fund to beat inflation by 5-7% over time. So if inflation is 6% you could expect returns of 11-13% pa from your pension fund. Also, don’t be fearful if your equity investment “loses” value in the short term – go back to your plan and goals and be reminded of the reasons that you made your decisions to invest and then stick to them.
8. Sign a service agreement with your advisor – Financial Planning is a process, not an event! You need to review your plan on an ongoing basis so set the parameters for the relationship upfront. Who is responsible for what, how are fees being calculated and paid? This is step 1 of the 6 Step Financial Planning Process (as endorsed by the Financial Planning Institute.) The agreement should lay the foundation for the relationship and should include the frequency of review/reporting and what is to be expected from each party in the relationship. It should also include a clause for exiting the agreement.
9. Never make a cheque (for your investments) out to an advisor or pay money for an investment into his/her account. Go back to rule 1 and think again. There are very few reasons that you should need to make cheques payable to advisors/deposit funds into their accounts – and if you ever do need to there are many checks and balances that need to be in place before this happens. If you are investing then make the cheque payable to the relevent company or better still, pay the money directly into their account.
