Make no mistake, investing is a tough game, one that is extremely unforgiving. However this checklist might help you can make it somewhat easier.
Very few investments will work well if you don’t give them time.
e.g. A balanced portfolio needs 5 to 7 years for best results.
Short term trading and speculating is different, and can be very risky unless it is your chosen profession (and even then, it’s still risky).
Decide if you are going to have 33% bonds, 33% property and 33% shares. Or 25% bonds, 50% property, and 25% shares. There are many variations on this theme.
Decide and then stick to it.
Allow a tolerance of say 5% and then rebalance. It is an essential discipline and yet a simple tool too. Rebalance or pay the price.
Junk bonds and certain properties might pay a higher yield, but if they do, the risk will be higher.
The NZ super fund just lost $200 million investing in a Portuguese bank – a classic junk bond.
However our bond funds are up around 9% for the past 12 months. No one ever did badly buying quality.
If in doubt, do half – apply this rule to all transactions
This is one of the best rules I know. It can apply to buying or selling bonds, multiple rental properties, shares, 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 will be glad you invested. If it falls, you can buy cheaper in 6 or 12 months’ time.
Find out and understand what this means, and never forget it. Diversification is more or less free too.
Diversify on and offshore too, since the small NZ economy lacks diversity, and is horribly exposed to earthquakes and imported diseases.
Investing in just a few shares
Investing in a few shares is playing. It can be fun, but is not serious investing.
Get experienced independent advice
There are very few truly independent advisers - only about 300 NZ wide.
Check costs, fees, and commissions
All of these matter, but the worst one 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.
Free advice is usually worth what it costs
A clever quote, but so true. Free advice is usually only offered to sell you their service or product.
Don’t buy any investment that is not liquid
Very few investments nowadays offer any advantage by being locked in. Liquid investments can double as emergency funds too, so why not.
Don’t try to invest based on forecasting or stock picking
I can’t find anyone who can consistently pick stocks, forecast interest rates or exchange, or economic events. If such a person existed, he/she would be looking after everyone’s money!!
In 2013 bonds averaged 1%, NZ shares 15%, global shares 30%, and global property 0%
In 2014 bonds averaged 8%, NZ shares 16%, global shares 9.5%, and global property 28%.
Few would have predicted these returns, but diversifying across them all has worked well.
Do not allow fear or greed to influence your decisions
US research indicates that the average DIY investor gets about 50% less return he/she should get.
It is thought DIY investors 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
15. 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
Makes sense to me.
Throw away the rose coloured glasses
Be disciplined. Be ruthless. Never fall in love with any investment. Look at both the pros and cons. If in doubt, write them down. Make haste slowly.
Supplied by Alan Clarke, financial & retirement adviser, & author.
His second book “The Great NZ Work, Money & Retirement Puzzle” is now available.
You can buy it on line at www.acfs.co.nz