SMSF plan: how not to make an omelet from a nest egg

OK. You've "taken control" of your self-managed super fund, allocated some of the funds to equities, decided (lied to yourself) that you are competent enough to be a fund manager, you've opened your online broking account, have money burning a hole in a cash management account and you are now ready to "invest".

The next lesson comes in two parts. Part I is, "How not to cock it up", a derivative of rules No. 1, 2 and 3 which say, "Don't Lose Money" and Part II is "How to make a half-decent job of it".

How not to cock it up

I know you think the focus is on doubling your money, but on the basis that if you lose 50 per cent you have to make 100 per cent to get back to square. Not losing money is, at this stage, vastly more important.

Just as a learner driver has the highest chances of having an accident, so do you, right now, at the beginning. So let's step you through the most obvious accidents. This will take a while, I'm afraid; there are a lot of ways to cock this up.

No.1: expectations. I was sent on a one-week residential sales course when I first joined broking in London in the '80s. Its sole focus was teaching us "How to sell financial products".

The formula was reasonably simple. All you had to do was get a potential client in a room and sell them "The expectation of an improvement in their standard of living". You know, all the Rene Rivkin boat imagery: buy this product and you'll be on a luxury boat. Buy this product and all your dreams will come true.

Raise that expectation and you had won, they would buy, and I have to tell you, they did and do.

Now, for most naive potential financial product sales people, the obvious question arose. What if the product didn't work? How could you guarantee that? The answer was, surprisingly enough, that the job was selling product, not improving people's standards of living, and in fact if the product did work it rather screwed the whole equation.

The fact that so many of the rich and famous are not happy tells you it is the expectation that generates a happy client and product sales, not success.

Selling product aside, the core realisation from the course was that in life, "happiness is expectations met" and, most relevant to you as you set out on the path of managing your financial future yourself, misery is expectations not met and in fact, on the basis that a loss has three times the emotional impact of a gain, expectations not met are a lot worse.

So if you want to have a good time as an amateur fund manager, the first thing you need to do is get your expectations right, and if you want to enjoy this foray into funds management they have to be realistic. And if you want to be happy, expect less.

So let's set your expectations. Step one, write down your goals and objectives. Motherhood stuff. What are your goals, what returns do you expect over what time period? What would represent success, what would represent failure? Discuss it with your dependants, it's very important. Get everyone affected by your financial bumbling on the same page. Luckily I have done this for you. Your goal for year one is this: "By June 2014 I want the same amount of money in the fund as I have now".

That's a good expectation. It's a little bit optimistic for a newbie with their finger over the "Trade" button, but if you set that as a goal and you get to June 2014 and you've picked up an education, a few experiences and not lost anything, you'll be happy.

If I ever come away from a day at the races not having lost anything I consider it a major success. In the same way, in the scheme of a 20-year stewardship of your SMSF, surviving year one in the current markets and coming away with an education and no loss will represent success. Set out to achieve that and that alone.

Imagine the joy if you make a profit. Far better than setting a "double my money" goal. Only misery awaits that expectation. So go and write it down somewhere. Show it to your spouse and come back here next week for step two of your "How not to cock it up trading plan".

Marcus Padley is a stockbroker and the author of sharemarket newsletter Marcus Today.