Throw away the rose coloured glasses
Be disciplined. Be ruthless. Look at both the pros and cons. If in doubt, write them down. Make haste slowly.
Very few investments will work well if you don’t give them time.
Short term trading and speculating is different, and can be very risky.
Work out an asset allocation that meets your risk profile
Decide on one - e.g. 33% bonds, 33% property and 33% shares - there are many variations on this theme. Decide and then stick to it.
Allow a tolerance of say 5% and then rebalance. This is an essential discipline and yet a simple tool too. Do it or pay the price.
Junk bonds might pay a higher yield, but if they do, the risk will be higher - no exceptions.
Higher yielding property will usually be higher risk, have little potential capital gain, or be in a waning provincial town - lesser quality.
No one ever did badly buying quality.
If in doubt, do half
This is one of the best rules I know. It can apply to buying or selling just about any investment, to loans to children, helping a wayward brother, and so on.
Average into investments over time
A logical extension of half now and half later. Once you have decided to invest, buy half now and half in 6 or 12 months (this is really easy to do with bonds and shares). Then stick to your planned date, and don’t try to second guess the marketplace.
If you buy half now and it does well, you are glad you invested. If it falls, you can buy more cheaper in 6 or 12 months time.
Understand this and do it. Diversifying is more or less free too.
In 2012 NZ shares returned 30% and global shares 15%. In 2013 NZ shares (to October) have risen about 12%, and global shares are up over 20%. Few people (if anyone) would have predicted these returns, so diversifying across both has worked well.
Diversify on and offshore too, since the small NZ economy lacks diversity, and is horribly exposed to earthquakes and imported diseases.
“But I know people who did not diversify & are successful ? ”
Yes, so do I, but 10 properties in Auckland over the past 20 years – lucky. 10 properties in Christchurch when the quake hit – unlucky. Do you want to trust your hard earned savings to luck ?
Investing in just a few shares
Investing in a few shares is playing. Can be fun, and you might get lucky, but is not serious investing.
Get experienced independent advice
There are very few truly independent advisers - only about 300 NZ wide.
Free advice is usually worth what it costs
So true. Free advice is usually offered to get you in the door - to sell you their services or products.
Buy liquid investments
Very few investments nowadays offer any advantage by being locked in, except maybe property.
Liquid investments can double as emergency funds too, so why not. A good reason to have other investments as well as property too.
Don’t try to invest based on forecasting or stock picking
I can’t find anyone who can consistently pick stocks, forecast interest or exchange rates, or economic events. They don’t exist. Invest using this checklist instead and you won’t go far wrong.
Check costs and fees and commissions
All matter, some are worth paying, but paying stock pickers and forecasters is usually a waste of money. Perhaps the worst fee/cost can be the person on commissions or sales bonuses who wants to sell you something that is good for him / her, but not necessarily good for you.
Do not allow fear or greed to influence your decisions
Dalbar (USA) research indicates that the average DIY investor gets about 50% less return than he/she should get. It is thought they mainly fail as they react to fear or greed;
- sell out near the bottom when things look bad
- buy near the top when things look good
Avoid new high fliers
The fiduciary guidelines say trustees should not invest if an investment ;
- Does not have a 3 year track record
- Is not of a reasonable size & is liquid
Supplied by Alan Clarke, financial & retirement adviser, & author. His second book is virtually complete, & he also writes regular articles for the media & on line – see www.acfs.co.nz
Alan is an independent authorised financial adviser (AFA) FSP26532 & his disclosure statement is available on request and free of charge.