Sometimes there are highly visible red flags waving everywhere and investors would be wise to take heed.
Sadly the red flags are about investment in New Zealand and over the last three years, New Zealand has been clobbered again and again:
The Christchurch earthquake.
The Pike River disaster.
More kiwifruit orchards are being destroyed by Psa.
The Auckland property boom is bound to cost us, one way or another.
The Fonterra shambles - it may or may not be a storm in a teacup, but it's a red flag.
NZ's sharemarket was last year's best market - is it now too buoyant?
The red flags are highly visible and offer all investors a free warning.
Diversification is largely free.
It is just not prudent to over-invest in New Zealand, even though it is a wonderful country.
It has a fault line running under it, it's over-reliant on one big exporter and it's awfully exposed to imported diseases. The scientists have said it is not a matter of "if" we get foot and mouth disease, but when.
There are 110 shares listed on the NZ stock exchange valued at about $52 billion. That is only 0.06 per cent as a proportion of global sharemarkets - not even one-tenth of 1 per cent.
The United States market is 486 times larger with more than 4000 shares listed, worth over $20,000 billion. The NZ market is dominated by a few stocks - the top five comprise 37 per cent of the market.
What do we do then?
Here is a typical asset allocation for balanced investors for $100,000:
NZ cash: $5000
NZ interest bearing: $12,000
Offshore bonds (hedged): $36,000
Listed property*: $10,000
NZ shares: $6000
Australian shares: $6000
Global shares: $25,000
Recommended time for best result is five years minimum.
* Listed property should be offshore if you already have substantial property in NZ.
Home country bias
The Australians and Americans are big on home country bias, but their economies are widely diversified. Wanting to invest locally is entirely rational, as it allows an investor to stick with companies they know. But investors with a lot of their money in NZ should look at the red flags and have a long think.
What about the BRIC markets?
BRIC - Brazil, Russia, India and China - have not been easy places to make money, and the return from investing in the BRICs over this year has been anywhere from -5 per cent to -15 per cent. The US, by comparison, has returned +19 per cent.
Some time ago a couple of NZ fund managers visited China to look for opportunities to invest. They returned fascinated by China and its huge growth, but said "somehow it feels as if any money to be made will be made by the Chinese, not us".
No rose-coloured glasses
Rose-coloured glasses have no place in financial affairs. We must be disciplined and if in doubt, we should write down the pros and cons of any financial venture before proceeding - and never rush. This process should be applied to buying a home, too, since it is often the biggest purchase we will make.
Hot opportunities and IPOs (new sharemarket listings)I was amazed at the hype and excitement over the recent Mighty River share issue. It was just another company on offer along with more than 5000 others around the world.
And was the Government going to give us a good deal? It was selling it because it has too much debt, so it could hardly afford to give us anything.
Investment is not about hot picks
Most of us will invest for 20 to 40 years, so the odd "hot issue" here and there is of little consequence. What is much more important is proper diversification, sticking to an asset-allocation plan and regular rebalancing.
Last but not least, in my opinion, asset-class investing has the edge on most other investment methodologies currently used today.
This article was supplied by Alan Clarke, author of Retire Richer - A Practical Guide For Everyone Aged 25 to 85. Clarke also blogs on www.investandretire.co.nz and is an authorised financial adviser whose disclosure statement is available on request and free of charge.