Secrets of Success: Before you do anything, read a good book

The Christmas/New Year period is traditionally the one when investors sit down with their financial statements, review what has happened to their portfolios over the year just gone, and settle on their dispositions for the coming year.

The Christmas/New Year period is traditionally the one when investors sit down with their financial statements, review what has happened to their portfolios over the year just gone, and settle on their dispositions for the coming year. As a result, it is the time when all the most important decisions tend to be made. Many studies have shown that the most important decision investors make is not which stocks or funds they buy and sell, but what changes they make (consciously or otherwise) to the overall asset mix of their accumulated wealth.

The irony is that few investors are in a position to review their overall asset mix, since they do not have the necessary information to hand, or in the right format. Most of us keep our various financial decisions (housing, pensions, stocks and shares, insurance, borrowing) in separate boxes, and deal with them on an individual basis. This is not efficient and costs the nation collectively a ton of money every year.

This is one reason why my first prediction for what will happen in the New Year is that so-called wrap accounts (horrible phrase) will finally start to become popular. The idea behind these accounts is that you can go to a single source, which in future will be a secure website, to see an up-to-date valuation and analysis of all your assets and liabilities.

There is no other sensible way to make optimal decisions about your finances, and technology is at last starting to make the idea a practical possibility. A number of companies are competing to take a slice of this new and potentially limitless new business. The initial users will undoubtedly be financial advisers (of all sorts), who are slowly coming to realise that this is the most cost-effective way to advise their clients.

The advantage that once-a-year investors have is that they can make decisions on the basis of their own instincts and tolerance of risk, instead of relying on so-called expert advice. The problem with the experts is not that they don't know what they are talking about (many do), but that they spend most of their time answering questions, for business reasons more than anything else, in which the clients do not, if only they knew it, have any real interest.

So, the traditional end-of-year review will typically end with the investor asking: "What shall I do next year?" - as if a 12-month period had any particular value in investment terms. All the evidence that I have seen in more than 20 years of observing financial markets points to the fact that 12-month forecasts are practically worthless. Most investors would be far better served looking at a three- or five-year horizon than at the next calendar year.

Lengthening your time-horizon not only produces more predictable outcomes, but also a better match for your personal objectives - which for most investors are properly measured in years, not months. The chances of being right about the direction of the equity or bond markets are demonstrably much higher if you take three years hence as your target date for measuring progress than if you take this time next year as the measuring point.

By the same token, you are more likely to arrive at a good decision if you read an investment book - which may have been written several months before, but is designed to have a longer shelf-life - than if you rely for your decision-making on this week's newspaper or magazine, whose life is by definition short and finite. (It goes without saying that there are some notable exceptions in the daily press, and these are becoming more valuable now that back issues can be accessed routinely via the internet).

My main advice to readers looking for something to read over the Christmas/New Year period, with a view to readjusting their portfolios, is to opt for a couple of timeless investment books or, failing that, to go back and read last year's newspapers instead of this month's. Top of my list this year would be a book that first appeared last year. It is called Tomorrow's Gold, by a veteran Asia-based investment writer called Marc Faber. It makes the case for reorienting your portfolio away from conventional equities and bonds, in favour of a greater weighting in commodities and gold.

That hasn't been a bad call this year, during which the weakening dollar has pushed up the price of oil and gold and local currency and sterling terms, but it makes even more sense from a longer-term perspective: the one that, on my assessment, matters most to the majority of investors. My advice is: read the book and see if it persuades you. If it does, act on it.

That does not mean selling all the shares you own and plunging into commodities instead. But it does suggest making a reasonable adjustment to the weightings of your portfolio in favour of these two asset classes. The reason for keeping a diversified portfolio is that there is always a chance you may be proved wrong. Anyone who tells you that any investment decision is a 100 per cent certainty is either a fool or a charlatan.

The second book I recommend for this year's stocking is called Bubbles And How To Survive Them, in which a sensible economist (a bit of an oxymoron) advises us that, whatever else we do, we should cut our exposure to property as an asset class. John Calverley's argument, that property has replaced equities as today's most overblown asset class, first appeared before house prices finally started to weaken in the late summer of this year.

It remains, incontrovertibly to my mind, right. If you read nothing else this Christmas, read this book and ponder on its message. It does not mean that house prices won't stage some sort of recovery in the next 12 months - your guess about that is as good as anyone else's, and the actions of the Bank of England can make a big difference to the short-term direction of the housing market - but in the medium term, reducing your weighting in property before the market does it for you is the kind of big but simple asset allocation decision that will assuredly dominate how well your finances stack up over the next few years.

jd@intelligent-investor.co.uk