Download The Six Absolute “Must Ask” Questions Before You Invest

The Six Absolute “Must Ask”
Questions Before You Invest
…BECAUSE WHAT YOU DON’T KNOW CAN HURT YOU
From The Series
The Retirement Planning Time Bomb… AND HOW TO DEFUSE IT
Tony Sandercock
wetalkmoney
Contents
What’s This Book About?
3
How Can I Lose Money With This Investment?
4
How Will This Investment Help Me Achieve My
Objectives?
8
Can I Easily Get Out Of This Investment?
10
How Much Do I Expect To Earn On This
Investment (And Is That Realistic)?
12
Does This Investment Make Sense After Fees
And Taxes?
13
Does This Investment Fit In With What I
Already Have?
15
What Next?
About The Author
2
Title of the book
16
17
Welcome
Ignorance about investing is not bliss… it’s expensive.
What you don’t know about investing will cost you money.
But the cure is simple – proper research.
Proper Research is what separates the professional investor from the
amateur.
Amateur investors act irresponsibly by risking their hard earned
dollars on hunches, articles they read, recommendations from
product salesman or hot tips, without first performing due diligence.
This approach is just asking for trouble.
Professional investors do the opposite. They take a long, hard look
before putting a cent of capital at risk.
Yes, it can be painful and sometimes difficult, but getting answers to
the tough questions up front can save you from expensive losses
down the road.
There’s simply no substitute for proper investment research because
it’s what you don’t know about the investment that will cost you.
Make sure you don’t miss a trick with these 6 “investor savvy”
questions.
The Six Absolute “Must Ask” Questions Before You Invest
3
Research Question # 1:
How Can I Lose Money With This
Investment?
This question is so important I’m tempted to throw away the remaining
five questions and just keep repeating this one over and over.
You don’t properly know an investment until you understand all the
ways you can lose money with it.
I can’t overemphasise the importance of this question.
You must first focus on the return of your capital, and only then concern
yourself with the return on your capital.
The first question
when analysing any
investment is to find
all the ways you can
lose money by
identifying in advance
all the major risks that
can lead to losses.
Once these risks are
fully identified, the
second step is to
minimise these risks
wherever possible.
The Six Absolute “Must Ask” Questions Before You Invest
4
Step 1 – Identify the risks
How many ways can you lose money? There’s a lot!
Don’t get too concerned, we’ll talk about the ways that you
can manage them later, but your first job is to identify
them all.
There are plenty of traps for the unwary, but for practical
purposes, they can be sorted in to a few major categories:
1. MARKET RISK - The risk that comes from just being part
of the investment markets. For example, if the share
market falls sharply, it’s likely that almost all shares
will go down in value. The same goes for the property
market and most other investment markets too.
2. SPECIFIC RISK - The risk that comes from owning an
individual investment. If it’s a share, that could be how
well that company is managed. If it’s property, it could
be the amount of unforeseen maintenance needed.
3. LEGISLATIVE RISK - The risk of the laws changing that
will affect your investments. Changing superannuation
rules is a great example of this, as are potential new
negative gearing rules for investment property.
4. INFLATION RISK - Inflation eats in to the purchasing
power of your money whether you are invested or not.
So it is a stealthy risk that can erode the value of a
portfolio year after year. Cash in the bank earning rates
of interest lower than inflation, is the best example.
5. CREDIT RISK - The risk that a borrower defaults on your
loan. For example, that loan you made to a family
member – it’s the risk that you won’t get your money
back.
6. LIQUIDITY RISK - The risk that you may not be able to sell the investment at short notice due to the
illiquid nature of a particular investment. An example of this is commercial property, that can
some times take a long time to sell.
7. OPPORTUNITY RISK - The risk of losing the income or earnings you could have made on one
investment because you did something else that wasn’t as profitable. An example of this might be
if you bought an investment property in one location and you miss out on the capital gain that you
could have achieved if you had bought the property in a better location.
The Six Absolute “Must Ask” Questions Before You Invest
5
Step 2 – Manage Those Risks
There are a number of things you can and should do to
manage the risks associated with investments. These
include, but of course, are not limited to:
 Making sure your investment strategy meets your
investment objectives and financial situation
 Understanding the nature of the investment you are
making
 Investing for at least the suggested minimum investment
timeframe for a particular investment vehicle
 Regularly reviewing your investments
The diagram below demonstrates the risk reward
relationship of four of the more common types of
investment:
IGNORANCE
About
Investment
Isn’t Bliss –
It’s
EXPENSIVE
Diversification is a key strategy to reducing risk, which is just a fancy way of saying “Don’t put all your
eggs in one basket”.
It means holding many different investments. This way, a loss in one market, is offset by gains in
others, producing a more stable and reliable return overall.
A well diversified portfolio will also allow you to capture positive returns, no matter where they occur.
The Six Absolute “Must Ask” Questions Before You Invest
6
Your Risk Profile
We all have different attitudes toward risk. Think about how comfortable you are with the possibility of
losing money, how long you have to invest and how you emotionally deal with market ups and downs.
You need to consider investments that balance your appetite for risk with their ability to reach your
financial goals. This is a decision that is very specific to you but it is an important one as you want to
able to sleep at night.
Only you can determine your 'sleep at night' factor.
There are a wide range of tools available to determine risk profile. Before you start using them remember
that risk profiling tools can:

help you understand how you feel about risk

clarify your understanding of your tolerance for risk

provide you with a general illustration of how people with certain risk profiles may choose to
diversify their investments
Never be a substitute for personalised and specific advice tailored for you

Explore the links below to the various risk profile tools. We suggest you pick a couple so that you can
compare results.
FinaMetrica
BT Investments
ASIC MoneySmart
Rest Industry Super
Below is a table that will explain some of the common terminology.
Investment style
Your primary investment goal is....
Conservative
Capital protection
You require stable growth and/or a high level of income, and access to your investment within 3
years.
Cautious
Capital protection
You require fairly stable growth and/or a moderate level of income. Your investment term is 3 years
or more.
Balanced
Capital growth
You can tolerate some fluctuations in the value of your investment in the anticipation of a higher
return. You don't require an income and you are prepared to invest for 5 years or more.
Moderately aggressive
Capital growth
You can tolerate a fair level of fluctuation in the value of your investment in anticipation of possible
higher returns. You don't require an income and you are prepared to invest for 5 to 10 years.
Aggressive
Long-term capital growth
You can tolerate substantial fluctuations in the value of your investment in the short-term in
anticipation of the highest possible return over a period of 10 years or more.
The Six Absolute “Must Ask” Questions Before You Invest
7
Research Question # 2:
How Will This Investment Help Me Achieve
My Objectives?
Sound like a silly question?
The old adage, “If you don’t know where you are going, you will
probably end up somewhere else,” is as true of investing as anything
else.
Your investment objectives might be to maximise profit while
minimising risk, or just achieving a particular return or even receiving a
certain amount of income.
But it’s not enough to just have a
portfolio objective – you must have
a personal objective too. Why?
Financial success is a lifelong
process.
The only way you’ll stay the course
long enough to succeed is when
your investment strategy fits your
budget, your interests, your skill
level and your lifestyle goals – that is
a recipe for success.
My 25 plus years of talking to people about their money has proven to
me that if you have clear objectives, you do better with their money.
Clear objectives give you purpose, direction and focus.
The Six Absolute “Must Ask” Questions Before You Invest
8
Goals Are Your Internal Success Mechanism
Goals Setting is said to be the most researched theory of
motivation in the field of organisational psychology.
Most of us understand the importance. Yet so few of us
actually do it!
Do a Google search, there is information everywhere. So if
you haven’t been through the process, it can’t be from a
lack of material. Here’s 3 observations:
1. One characteristic that sets apart the peak performer in
any aspect of life is their intensity. They are goalsetters. They are motivated by compelling, burning,
internal goals. It comes easy to them, because they love
what they do.
2. Money is a shallow motivator. The thoughts by which
successful people establish their goals might be the
good they can bring to other people or to be the best
that they can - anything but money. Yes, there has to
be a payoff for you, but if you want people to come on
the journey with you, it's got to be bigger than you.
3. A popular view is that we become what we think or
believe. Change your thoughts, change your life.
It’s a seductive concept.
But if you’re struggling with financial hardship, it will
take more than an attitude adjustment to move you
from suffering to joy. Success is directly connected to
action. You have to keep moving. The best way to feel
better about a situation is often just to make that first
move in doing something about it.
There are any number of approaches you can take. Just google "goal setting", and there are tools, tips
and information everywhere. Do some research and choose one that suits you. Personally, I
like SMART Goals but there are plenty to choose from.
What matters most is that you actually do it.
The Six Absolute “Must Ask” Questions Before You Invest
9
Research Question # 3:
Can I Easily Get Out Of This Investment?
Always begin with the end in mind.
Why? Because not every investment will be right forever.
Times change, investments change, you change.
You had a reason for buying an investment, and when those reasons no
longer apply, it’s time to move on.
By knowing your reasons in advance, there’s no confusion or hesitation
with the sell decision.
I can not think of many investments that I wouldn’t sell if circumstances
required it.
Your job as an investor is to understand what those circumstances are,
so that you are ready to take action.
The Six Absolute “Must Ask” Questions Before You Invest
10
Know When to Hold ‘Em, Know When
to Fold ‘Em
Most people who ask about when to sell are often staring
at a big loss. What do you do? Many would say not to sell
“until you get your money back”.
This is a common response to a poor investment. The pain
of losing a dollar is so much greater than the joy of gaining
the same amount.
In fact, our need to avoid a loss can be so great, we can
become incapable of sound judgement.
So what should you do if you are staring at a big loss. Do
you cop it and move on or hang on and hope it will bounce
back?
Well, that all depends on your circumstances.
However, I have an observation to share after watching a
lot of people lose a lot of money on dud investments deals
over the years.


Time does not turn a bad investment into a good one.
The reality is, that money is gone.
IGNORANCE
About
Investment
Isn’t Bliss –
It’s
EXPENSIVE
You can anchor your expectations on getting back to where
you started, but what you paid for that investment is
irrelevant to the next buyer.
All you can deal with is the here and now.
The question to ask yourself is, given what you know about
the investment right now, being its growth potential, its
income, risk, affordability and so on, would you buy that
investment today?
Another time to look at the makeup of your portfolio is when your circumstances change. Retirement is
the classic example. Investments that make up a great wealth creation portfolio, may not be the best
investments to support a retirement income stream. A retirement income portfolio is best when it has
liquidity, flexibility and security. Not all growth assets have those characteristics, hence the need to
re-evaluate in the lead-up to and upon retirement.
The Six Absolute “Must Ask” Questions Before You Invest
11
Research Question # 4:
How Much Do I Expect To Earn On This
Investment (And Is That Realistic)?
Early in my career, a couple of very powerful phrases were drummed in
to me:
1. “The share market has averaged 12% over its history.”
2. “Property doubles every 7 years”
They stuck in my head, and may have even made their way in to my
vocabulary very early on.
But are they true? The answer is that both of these statements are
ridiculous.
Let’s stick with the share claim. I took
some time to ask some industry
colleagues their thoughts on this issue.
A small number say 10%, and a great
deal of them say somewhere in the
range of 8% before costs and taxes.
“If someone is relying on a 12% return to get them to retirement or pay
for their kid’s schooling and that return doesn’t materialise, they are in a
world of hurt with very limited and unattractive options. 7% (assumed
rate of gross return) allows me to focus on what a client can control:
their savings rate,” noted one fee-only financial advisor.
Download here a brilliant resource that provides historical performance
for most share and fixed interest markets over any time period.
The Six Absolute “Must Ask” Questions Before You Invest
12
Research Question # 5:
Does This Investment Make Sense After
Fees And Taxes?
Successful investing is about what ends up in your pocket.
And depending on the investment you have, it can sometimes be hard
to nail down exactly what you’ve earnt after all the costs and taxes are
taken in to account.
But you need to. While moves in the market are temporary, costs are
permanent. Over time, they can put a real dent in your wealth plans.
That's why you MUST be
mindful of fees and
expenses.
Studies show that cost is
actually the single best
predictor of future
investment performance for
some investments.
Leading research organisation Morningstar even found that cost
predicted the future performance of managed funds better than their
own widely-used star rating system.
The Six Absolute “Must Ask” Questions Before You Invest
13
Case Study
Meet our investor, Bill. He is single and earns $100,000 per
annum. He has three investment strategies – a residential
investment property, share trading account and a managed
These same rules apply to his share
trading. Bill bought some shares for
$10,000 two years ago which are now
worth $20,000. His broker is
fund invested in International Shares. Congrats Bill, great
suggesting to take a profit and invest
work!! Let’s now drill down in to each of these strategies
that in the next “big thing”.
and see how costs and taxes impact his profits.
Let’s look closely at that. Fees and
Bill bought his property for $400,000 a few years ago. He has
Capital Gains Tax add up to around
just received a firm offer for $500,000. He’s found dealing
$2,000.
with tenants a real hassle and figures that a $100,000 profit
might be worth taking. Let’s look at that a bit closer. What
is his true profit after fees and taxes?
What did it cost him to buy it? - $10,000 in stamp duty,
transfer, legal and bank fees.
What did it cost him to own it? The rent didn’t cover the
So that means that the new
investment will need to earn that
$2,000 just to cover the cost of the
transaction.
That’s a rise of 10% just to break
even!!
expenses, so after tax, he paid $10,000 from his own money
What will it cost him to sell it? – About another $15,000 in
Read more here about the costs and
real estate agent fees and other costs
benefits of share trading
What about tax? – This is an investment property, so capital
gain tax applies. $12,000, thanks very much.
That’s a total of $47,000 in costs and taxes, or nearly half the growth of the property. Even so, the
$53,000 profit is money he would not otherwise have had, which is great. But what looked on the
surface to be a solid profit of 25%, is in fact a lot less. Maybe Bill should consider keeping this
property for the long term, so that those costs can be spread out over many more years.
Let’s now look at his managed funds. Bill has invested in a large actively managed International share
fund. An active manager is trying to beat the market return by actively buying and selling shares.
This results in higher fees and higher taxes. Markets have been strong in recent years, so on the
surface, Bill’s fund seems to have performed well. But an investor can only spend the post-tax, postfee investment return, which can be significantly lower than the headlines would suggest. Read this
article to understand how high turnover funds are weighed down by these higher costs and taxes.
The Six Absolute “Must Ask” Questions Before You Invest
14
Research Question # 6:
How Does This Investment Fit In With What
I Already Have?
No investment decision should ever be viewed in isolation.
You aren’t just buying a share or a bond or a managed fund or a rental
property - you are buying an additional piece of your personal
investment jigsaw puzzle.
And each piece must interlock.
Just because it looks
good on its own does
not mean it will fit in
well with what you
already have.
In my experience, more
wealth is destroyed by
poorly balanced
portfolios than any
other cause.
Yes, apples are good for you, but if that’s all you eat, you’ll eventually get
sick.
The Six Absolute “Must Ask” Questions Before You Invest
15
Next steps
There you have it! Investing can be a successful or disappointing
experience, depending on how well you do your research.
Getting the answers to the tough questions up front can save you from
expensive losses down the road.
A quick review of the six “must ask” research questions is:
1. How can I lose money with
this investment?
2. How will this investment
help me achieve my
objectives?
3. What’s my exit strategy?
4. How much do I expect to
earn on this investment
(and is that realistic)?
5. Does this investment make
sense after fees and taxes?
6. How does it fit in with what
you already have?
That list is just a start. You could write an entire library of books on the
subject.
My goal with this EBook was to arm you with some of the more
important due diligence questions that can help you avoid the most
obvious and expensive errors.
I hope it helps you.
The Six Absolute “Must Ask” Questions Before You Invest
16
About The Author
What do tough but fair parents, a World War 2 veteran, football coaches and
business mentors have in common?
For Tony, they all had a key role in molding him into the person he is today.
They showed him the importance of honesty, integrity, discipline, hard work
and most importantly, taking a genuine interest in people and helping them
improve their lives.
It was this desire that led him to start his first financial services business is his
early 20’s and eventually move on to take up a national manager role with
Australia’s fastest growing financial advice firm.
As a truly independent advisor, many of Tony’s clients have come to him
frustrated at the lack of trust in the financial industry. Too many planners put
their own interests ahead of their clients. As there is no conflict of interest in
the relationship, Tony can give his clients the best, impartial and objective
advice to help them reach their goals.
Others are confused and paralysed by fear, not knowing where to start or
what to do. With his uncanny ability to separate what is important from the
noise, he simplifies complex decisions leaving his clients with a clearly
defined path to retirement.
"I have been in the accounting industry for close to 25 years and have been
very sceptical about the true value of the financial planning industry and the
real value that planners provide. During this time, I have searched high and
low to create a connection with someone who treats the clients like I do and
I feel will be there to listen and work with their clients to achieve financial
and life goals. Tony is the closest person I have found who shares my values
of client care and service and in my opinion is not your typical financial
planner" Ian Judson, Brisbane QLD
The Six Absolute “Must Ask” Questions Before You Invest
17
IMPORTANT INFORMATION
This information is of a general nature only and
may not be relevant to your particular
circumstances.
The circumstances of each individual and investor
are different and you should not act on this
information without speaking to a financial, tax or
legal adviser, who can consider if the financial
products and strategies are appropriate for you.
To the extent permitted by law, no liability is
accepted for any loss or damage as a result of any
reliance on this information. See full Terms and
Conditions here.
Tony Sandercock is Authorised Representative No.
287974 and TTLB Investments Pty Ltd ABN 22 600
525 764 trading as wetalkmoney is a Corporate
Authorised Representative No. 467267 of AspectFP
Dealer Services Pty Ltd ACN 091 004 885 AFSL No.
225738 of Unit U6, 68-70 Old Princess Highway,
BEACONSFIELD VIC 3807.
From The Series
The Retirement Planning Time Bomb…
AND HOW TO DEFUSE IT
wetalkmoney
18