If you had 10 properties in Auckland over the past 20 years, and nothing else, you would have done well. Even though you lacked diversification, you would have done well – but you were lucky.
Don’t get me wrong, I feel sorry for anyone who got hit, especially if their retirement was ruined.
However this is a graphic illustration of how unforgiving investing can be.
If you had a big forestry block in Canterbury during the big September wind storm, it would have got flattened - unlucky. And if you had no other investments, you would be really hurting.
But if your forestry block was only 5% of your investment portfolio, you would not be hurting too much.
So why don’t people diversify?
All too often people wear rose coloured glasses, and somehow or other convince themselves that they have found “the best investment”, and then they put everything into it.
Do that and you are trusting to luck.
Don’t. Be disciplined. Be ruthless. Look at both the pros and cons. If in doubt, write them down. Make haste slowly. Diversify or pay the price.
It’s easy to fix
Investing does not have to be is a tough game, indeed all you have to do have to follow the rules and be disciplined. It’s the same in many aspects of life, of course.
In my previous career, I flew small aeroplanes and helicopters for 20 years, and in all I flew 11,000 hours. I flew in NZ, Africa, the USA and the UK, spent 14 years overseas, and I thoroughly enjoyed it all.
I had been a “student” of aviation since age 10 and had read just about every book and accident report there was. I learnt that 45% of accidents are due to flying low and slow, and another 45% due to bad weather. (It’s a pity that there are no accident reports for investors).
Aviation, just like investing, is very unforgiving for those who do not obey the basic rules.
I survived those 20 years with only a few minor incidents, because I knew and obeyed the rules.
Luck plays no part in it
Don’t trust to luck. Too unreliable.
Once you stop work you can’t afford to get it badly wrong, because you can’t go to back to work, and you can’t earn and save it again.
You can’t afford a Christchurch 10 house scenario.
You can’t afford be all in forestry, or in any single asset class.
You can’t afford to get scammed either.
And you can’t find a top performing guru.
Stands to reason
If someone could outperform year after year, everyone would invest with them.
I have been in this business from 25 years and I can’t find such a person.
There is a way though.
Diversify widely across all asset classes
Use efficient asset class funds with impeccable reputations (There are Nobel Prize winners within the companies we use).
Buy quality and give it time.
Stick to an asset allocation & rebalance regularly.
Keep an eye on risk. If returns are our sole focus, we might lose sight of risk. It’s not always about returns, as we also need to survive credit crunches as intact as possible (such as 2008 and 2009.)
If in doubt, do half.
Do not allow fear or greed to influence your decisions - they are killers if you are a DIY investors.
You might be inadvertently trusting to luck. Make sure you’re not.
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.