25 August 2016
Investing: some basic principles
Are you interested by finance and investments? You will certainly be asking yourself some questions. Is now a good time to buy or to sell? Invest in what and for what amount nowadays? We would like to remind you of a few basic investment principles.
Say true to yourself
If you are of a rather cautious nature, it is best not to take exaggerated risks. Are you bolder? Then taking more risks can be worthwhile. Nevertheless always bear your investor profile in mind. Investors should always stay true to themselves.
What are the investment profiles?
Under “MiFID” rules on the protection of investors, ING Belgium has developed different investment profiles. They are determined by means of a questionnaire which asks customers about different aspects: their knowledge and experience of investments, their investment objectives, their financial situation, their investment horizon and their attitude towards risk. Such profile then determines the investment strategy which will be followed.
Overview of the various profiles:
- Capital protection is of vital importance
- Investors only take a limited risk
- They avoid fluctuations
- Minimum investment horizon of 3 years
- Portfolio mainly made up of bonds and cash, but can include up to 20% in shares (and/or similar)
- Capital protection is of moderate importance)
- Investors take a moderate risk
- They accept moderate fluctuations
- Minimum investment horizon of 3 to 5 years
- Portfolio mainly made up of bonds and cash, but can include up to 40% in shares (and/or similar products)
- Investors target a balance between capital stability and growth
- They are willing to take a calculated risk on capital
- They accept fluctuations
- Minimum investment horizon of 5 to 7 years
- The portfolio targets a balanced spread between, firstly, shares (50%) (and/or similar products) and, secondly, bonds and cash (50%)
- Investors target capital growth in the long term
- They dare to take risks
- They accept sizeable and sudden fluctuations
- The investment horizon is more than 7 years
- The portfolio is mainly made up of shares (and/or similar products) and a limited percentage of bonds and cash
Do not give way to your emotions
When investing, take the advice of an expert whom you should choose with care! Perhaps your neighbour or best friend has been investing for years, yet that does not necessarily mean that they have the same needs and the same attitude towards risk as you. It is preferable to take your own decisions with the help of somebody who knows about investments, your profile and personal circumstances. Do not let your emotions or those of other people influence you.
Determine your risk sensitivity
Financial market trends are rarely flat-line. They can fluctuate both upwards or downwards. Investing implies risks. But why, then, take this type of risk? To attain a possible return. When you invest you hope that the risks you are taking will be rewarded. The riskier the investment, the higher the potential return yet return is not guaranteed. Quite the opposite. To that end it is important to determine your risk sensitivity, taking account of your personality. If a rise or fall of your capital keeps you awake at night, then investment might not be for you. Conversely, if you can live with capital variations you can envisage investing.
Invest with a well-considered investment horizon
It seems logical to only invest with money you do not need in the long term. Ensure you always have a sufficient reserve to materialise your projects and to cover any unforeseen expenses. For instance it does not make much sense to invest money you will need in the near future to buy your dream home. However, if you do have sufficient reserves, you can invest according to the principles laid out in this document, your investor profile and your banker’s advice.
Opt for a diversified portfolio
You will have certainly have heard that you should diversify your portfolio. Therefore you will also know that, in most cases, it is best not to put all your eggs in the same basket. Why not? Simply as it is impossible to forecast which category of assets (cash, bonds, shares, etc.) will perform the best in the course of one year. For your portfolio to fluctuate as little as possible, opt for investments in different asset classes, different sectors (consumer goods, health care, etc.) and different geographic zones (eurozone, Japan, etc.).
Investing as an expat
As an expat, you spend your life in several countries: the country where you were born and that where you work and live. Frequently you have substantial resources and you invest them in both countries. This does not really cause any problems but you need to be aware of the impact on your tax return.
Over recent years the tax authorities have made enormous progress in the field of cross-border fiscal checks. By law, you must declare your income in the country where you have your fiscal residence, often your host country. If you fail to do that, you could be fined, or even the subject of legal proceedings. This is why it is important to be helped by an investment partner who knows all the laws and regulations. He or she will tell you what you need to know.
Are your affairs in order? Ask your bank! Where appropriate, sort out your affairs with the tax authorities. Best to rectify any errors yourself rather than being called to order!
These basic principles can help to give you an idea of the best behaviour to adopt when investing. Nonetheless it is crucial to compile an accurate investment profile with your banker. Your banker can determine your investment profile and advise you appropriately by learning about your needs, your financial circumstances, your knowledge, your experience, your investment horizon and your risk sensitivity.