We need a higher return from our money.
We need much more diversification too.
Don’t wait for good times, and pay dearly.
Buy in gloom and sell in boom
Be prudent and “average in”.
Properly structured savings and investments can also double as emergency funds.
Beware of advice driven by commissions.
Long term Kiwisaver members should be in a growth or balanced portfolio.
It is well known, or should be, that successful savers and investors “buy in gloom and sell in boom”. Yet right now fear abounds, with too many Kiwisavers in cash funds, and investors are scurrying to their banks, or sticking their money under the bedcovers.
The question maybe why you would invest outside cash or banks ? The answer is probably “needs must”. A conservative to balanced portfolio over time is likely to make 2% more per year than a deposit at a bank.
So $100,000 at 2% pa more than cash/ bank = $2,000 pa.
Not much ?
What about $2,000 pa. over 20 years = $40,000 more than cash in a bank.
Most people, especially when retired, need this extra return.
Buy in gloom & sell in boom
All the news headlines are negative and investing now looks scary. The media have done their job, bad news sells and fear abounds.
But the old adage says successful investors “buy in gloom and sell in boom”. Yet people only want to invest in boom – when things are good – which means prices are high. The wrong way around !!
WW1, 1929, WW2 & many other troubled times
Whilst the news indeed looks scary, the world recovered from World War 1.
The world also recovered from the 1929 Depression, World War II and many other crises.
We do know that bonds over time have returned 1% to 3% over bank deposits.
We do know that shares over time have returned 4% to 5% over bonds.
We do know that shares usually reward investors for the risk if they are patient.
Some people prefer do-it-yourself , but research shows that DIY investors in the US from 1998 to 2008 made 3.9% pa. whereas holding the top 500 shares (the S& P 500 index ) made 9% pa. (Dalbar Research).
That’s right, by just holding the market, some investors made double what the active DIY investor made.
Research indicates that no one can consistently forecast markets, exchange rates, economic events, or pick shares / stocks. There are plenty of people around who infer that they can, with glossy brochures and sometimes lots of (not easy to see) fees. We should heed Warren Buffet who said “the only value of stock forecasters* is to make fortune tellers look good.”
*sharebrokers who tell you which shares are a “good buy”
We prefer the asset class model, which is in effect very efficient version of index investing, with very wide diversification across bonds and shares. Our model would include 200+ bonds and 5,000+ shares.
Not much property though as most people in NZ already have a lot tied up in property (normally their own home).
Asset class bonds and shares are liquid, so easy to get at, and rebalance as and when necessary.
Nb. Kiwisaver is not liquid as it is locked in to retirement age.
A prudent person might say “OK but I want to feel my way rather than jumping in” – fair comment.
There is a simple strategy that every investor can use – “dollar cost averaging”. Invest progressively at say $200, $500, $5,000 per month, or $1,000, $5,000, $10,000 every 3 months. There are lots of variations of this strategy can be used.
Risk Profile and Rebalancing
Every investor should at the outset establish his/her risk profile, and then use an asset allocation (the proportions of bonds to shares ) and stick to it.
A conservative to balanced investor might be 60% in bonds and 40% in shares.
Then when markets rise he/she can take profits by rebalancing – a variation of “selling in boom .”
Remember too that the 60% in bonds is low risk ( actually very low risk the way we do it).
Fees & Costs
Something that needs careful attention too – we will have to leave this for a future article, but for starters avoid any advice where commissions are involved – commissions can negatively distort advice.
All too often overlooked in NZ. Most of us should hold somewhere between 3 and 6 months income that is easy to access in case of an emergency.
Emergency money should never be in the same bank that holds your mortgage either, for obvious reasons. Preferably your bank should not even know you have it.
“A bank is an organisation that lends you money when the sun is shining, but wants it back when it starts to rain.”
A conservative to balanced investment fund doubles very nicely as an emergency fund.
Note; Kiwisaver cannot be used as an emergency fund as it is locked in to retirement age.