The FMA chief executive Sean Hughes has recently been reported to have said “the FMA is worried about that an Auckland property bubble has formed and that potentially catastrophic society- wide consequences would result if a correction took place.”
Apparently the FMA’s biggest concern about housing is that asset prices, as economic historians would tell us, can’t keep rising indefinitely.
Hughes also said “anyone who might be advising people to put their entire savings into housing were giving unsound advice. We would challenge any financial adviser who said you should put all of your nest egg into a single asset class, particularly where there is a risk that the value of that asset class could be overheated.”
Not rocket science really. Why would any investor want to buy into a market that was already overheated ?
And all investors know not to put all their eggs in one basket , don’t they? I hope so.
Anyway it is interesting to see that the FMA could expand its attention to real estate as an investment if it appears unsound advice is being given.
Kiwis like property
I like property, just like many other Kiwis. However I also know that diversification is essential if investors are to have long a long-term successful investment experience.
It is also pretty well known that investors should in fact be going the opposite way to the herd.
If everyone seems to be piling into Auckland property, then prices are likely to be high (they are) and so intending investors should perhaps hold off for a while, and keep their powder dry.
But “they say” get in now as prices will just keep rising. Maybe “they” are right, it’s impossible to say.
If an investor takes that view and wants to go ahead, then that is a personal decision, but maybe it would be a good idea to rationalise and just buy one property
Single investment vs diversification
It does not matter really what sort of investor you are, you will do better in the long run if you make sure you understand and practice diversification.
Some years ago I met an investor who decided to put 25% of his money into Telecom shares because “they were paying such good dividends and they owned all the copper wires in NZ”. However technology advanced rapidly and government encouraged more competition. Before too long the Telecom share price had fallen by over 50% and he lost over $50,000.
Avoidable risks include holding too few securities, betting on countries or industries, following market predictions, speculating in areas like interest rate movements, and relying solely on information from third-party analysts or rating services.
Diversification is an essential tool available to investors. While it does not eliminate the risk of market loss, diversification does help eliminate the random fortunes of individual securities and positions your portfolio to capture the returns of broad economic forces.
A well designed portfolio will focus on the factors that drive investment returns while reducing excess and undesirable risk.
Last week we wrote about Peter who was 100% in rental property in Auckland. He had done well over a long period, and figured out it is a good time to sell/take profit/diversify while prices are high. Although he loves property, he had seen people get badly burnt by not being diversified.
Accordingly he decided that in future he will have;
- 25% of his money in bonds, on and offshore, since they are liquid, low risk and pay income
- 50% of his money in property – he knows maybe still too much, but he loves it and understands it
- 25% of his money in shares, mainly offshore, for the purposes of diversification, potential growth, and liquidity
Peter is on to it.
The FMA tomorrow
The FMA cannot protect investors in every instance, and cannot guarantee that every investment will be successful.
However they are certainly on the right track when it comes to ensuring that sound advice is being given, and that diversification is emphasised and encouraged.
This article was supplied by Alan Clarke who is the author of a book entitled “Retire Richer” which is a practical guide for everyone age 25 to 85.
Alan also writes a regular blog on www.investandretire.co.nz
Alan is an authorised financial adviser (AFA) and his disclosure statement is available on request and free of charge.