Finance: Plan investments and follow the rules

By Alan Clarke

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Follow and obey the rules of investment.
Follow and obey the rules of investment.

Major storms in the past few weeks have clobbered investors with losses of 60 per cent or more in Canterbury forests. The storm damaged huge tracts of pine forests, and local investors are counting their losses.

The New Zealand share market is considered to be overvalued after a strong rise over the past 18 months. In May some experts warned it is 10 per cent over valued.

Hefty and painful forestry losses

A storm last month flattened huge tracts of forestry in Canterbury. Some investors were reported to be only seven years away from retirement and harvesting big blocks of pine trees - a 30-year investment.

They hope to sell the fallen trees for about 25 per cent of the money they might have got in seven years' time. Then they will probably replant the land, and try to sell it, since another 30 year time frame is beyond their life expectancy.

Experts said planting and maintaining a forest did not cost much, but it takes about 30 years for pine trees to mature. In that time, storms and fire could destroy the trees, and wind insurance is not available.

Planting a hectare of forest costs about $1500 and costs about $4000 per ha to maintain the trees for the first eight years. After that, investors usually sit back and wait 22 years until harvest.

Same old, same old

Forestry losses, buying over valued New Zealand shares, and earthquake-damaged uninsurable houses are not exactly low risk. I hope all these investors have other investments, too as diversification is important. I hope they have liquid investments, so they can easily get at cash in emergency.

Investing is a tough game, extremely unforgiving, and lack of diversification can really hurt.

So can seeking a high return - the higher the return the higher the risk - no exceptions.

NZ shares overvalued

Twice this year I have heard that the New Zealand share market is overvalued - a "stretched market". For example, Fletcher Building is thought to be 30 per cent over valued. No surprise, a lot of investors are getting excited about the profits Fletcher's might make in rebuilding work in Christchurch. But now Fletcher Building shares are expensive, and their competitors won't be asleep either.

If a market is overvalued, take profit, or at least reduce your holdings. Most New Zealand investors would be wise to limit New Zealand shares to 10 per cent of their total investments.

Obey the rules or get burnt

* Reduce or avoid overvalued markets.
* Diversify widely.
* Average in.
* Plenty of NZ specific risks abound - earthquake, imported diseases.
* No place for rose coloured glasses.
* It takes a long time to make up big losses.
* If in doubt, buy (or sell) half.
* Buy when everyone is selling.
* Sell when everyone is buying.
* Buy quality.
* Invest offshore too, since New Zealand is tiny at 0.4 per cent of world markets.
* Get experienced advice.
* Think twice about advice where the adviser or promoter gets commission or brokerage.
* Free advice is worth about what it costs.
* Do not kid yourself - picking shares is a tough game.
* Preferably buy liquid investments, as emergencies do occur.
* Do not allow fear or greed to influence your decisions.

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