We are often asked about wider personal financial planning issues as our clients start to think about transition into retirement. Authorised Financial Adviser (AFA) Simon Stredder from Hassan & Associates addresses some of these issues.
A key assumption of classical economics is that we humans are rational creatures. This has recently been turned on its head by studies of actual human behaviour. The research suggests that while we tend to make small decisions rationally, our limbic brain – the seat of our emotions – tends to take over when we are faced with big decisions. We are inclined to rush into decisions based on fear and greed rather than calm consideration and research.
A respected economist was once asked what would happen to interest rates. The immediate answer was a confident ‘They will rise by 2 percent.’ But when the questioner followed up with ‘When?’ the economist replied just as quickly: ‘Oh I couldn’t tell you that, and they may fall first!’
This story reminds us that no one can see into the future. Because of this, the important thing when designing or managing an investment portfolio is to do what you can to make it ready for whatever may happen. This usually means spreading your investments around. Trying to predict next year’s great investment idea is folly.
A well-diversified portfolio combines investments from a range of different sectors. Done properly this can limit risk and volatility without reducing expected returns.
This information is general in nature and not intended as personalised financial advice.