Investors are hardwired to fail
Investor failure can be largely attributed to fear and greed.
Greedy investors tend to buy when everyone else is telling how well they have done -- when markets are high and things look good.
Markets high = shares expensive (NZ 1987 and China 2015).
When one canny investor starts to sell and take profits the market dips and like lemmings fearful investors panic and sell at a loss.
What happened to "Buy in gloom and sell in boom" ?
Better research
I have a two-seater microlight motor glider (quite sophisticated) and have flown it all over New Zealand. Several days before I take off on a long trip I start a process of pre-flight planning.
I organise maps, look at the long range forecast, identify alternate airfields, make fuel calculations and so on, as you would expect.
It would hurt my pride to damage my lovely plane and I don't want hurt my passenger (my lovely wife) or myself.
Investing is no different
It hurts to lose hard-earned money saved up over time so some forward planning is required. Don't just jump in.
We all know the most important rule, don't we? Don't put all your eggs in one basket. That means not one stock but several, not one country but several, and not one asset class but several.
Many unfortunate people came a cropper by investing in all Kiwi shares prior to 1987 and all Chinese shares in 2015.
Sample plan for $50k $10,00 Cash, hold to invest later
$5000 NZ government bonds
$5000 NZ corporate bonds
$5000 Global government bonds
$5000 Global corporate bonds
$5000 NZ shares
$5000 Global share hedged
$5000 Global shares unhedged
$5000 Global property shares
Total: $50,000
Don't want to do that?
Everyone is making so much money, and you want in -- now! You're putting in your $50,000.
Oh no, it's going down, it's not supposed to do that!
Oh no, you've lost $30,000.
Hindsight is costly
There's that pesky adviser who told you to diversify but you're too embarrassed to tell her what's happened.
Quick, you'd better cross the street to avoid her.
A month later, regret sets in
You wonder what would have happened if you'd done what she recommended. Eventually, you pluck up the courage to ask.
She says you would still have $49,000 today, as most other markets are stable, some have risen a tad, bonds are ticking along and, given time, the diversified portfolio will do a good job.
But at about 3 per cent above bank rates, not 25 per cent or 50 per cent.
3 per cent isn't to be sniffed at$50,000 invested for 30 years at 3 per cent more than a bank:
$1500 per year x 30 years = $30,000.
$167,000 at 3 per cent over 20 years:
$5000 per year x 20 years = $100,000.
One year on ...
I asked her again for an overview and she said that investing means a properly diversified portfolio.
And that investing heavily into a single share market that's booming is called gambling.
What investors need to do is decide if they are investors or gamblers. If they are investors, then they should start out by making haste slowly.
No free ride
Some of my key phrases from last week apply:
* What does your common sense tell you?
* If in doubt, do half
* There's no free ride
* If it's offering big interest or returns there will be big risk
* Diversification is free
So, big NZ share market losses in 1987 were avoidable
In fact, global markets recovered within a few weeks. Had Kiwis been properly diversified, they would not have felt any pain.
And big Chinese share market losses in 2015 were avoidable
Global markets did not fall like China. Had the Chinese people been properly diversified, they too would not have felt any pain.
Alan Clarke is a financial and retirement adviser and author. His second book, The Great NZ Work, Money & Retirement Puzzle, is available at acfs.co.nz Alan is an independent authorised financial adviser (AFA) FSP26532; his disclosure statement is available on request and is free.
