Now we hear that ordinary people in China put their savings of $30,000 or $50,000 or more and lost over 50% of it in a mini share market crash last week.
Again didn’t have to happen.
US shares rose by over 10% pa. Since 1926.
Yet research from Dalbar in the USA indicates that do-it-yourself investors on average will make only 50% of the return on offer.
Investors are hard wired to fail
Investor failure can be largely attributed to fear and greed.
They tend to buy when everyone else is telling how well they have done - when markets are high and things look good – greed.
Markets high – shares expensive – NZ 1987 and China 2015.
Then someone smart starts to sell and take profits, the market dips, and like lemmings they panic – fear - and sell at a loss.
Yet we are told again and again to “Buy in gloom and sell in boom”
What should they have done?
I have a two seat microlight motor glider (quite sophisticated) and have flown it all over NZ. However several days before I take-off on a long trip, I start a process of pre-flight planning.
Getting maps, looking at the long range forecast, alternate airfields, and fuel calculations and so on, as you might expect.
It would hurt my pride to damage my lovely plane and I don’t want hurt my passenger, my lovely wife, or myself.
Investing is no different
It hurts to lose hard earned money that took a while to save, so some forward planning works is required – not just jumping in.
We all know the number one 1 rule, don’ t we? Not all your eggs in one basket. That’s means not one share, but several, not one country but several, and not one asset class but several.
So not all of your money in NZ shares in 1987 – but people did.
And not all of your money in Chinese shares in 2015 – but it looks as if they did.
How about this for $50,000?
Cash - hold back to invest later $10,000
NZ government bonds $5,000
NZ corporate bonds $5,000
Global government bonds $5,000
Global corporate bonds $5,000
NZ shares $5,000
Global share hedged $5,000
Global shares unhedged $5,000
Global property shares $5,000
No! I don’t want to do that
Everyone is making so much money, and I want in - now! I’m putting in my $50,000.
Oh no, it’s going down, it’s not supposed to do that!
Oh no, I’ve lost $30,000
Quick, cross the street
There’s that pesky adviser who told me to diversify – I am too embarrassed to tell him what’s happened. Quick, lets cross the street to avoid him.
A month later – wondering…………………………
I wonder what would have happened if I had done what he recommended. I plucked up courage and asked.
He said I would still have $49,000 today, as most other markets are stable, some have risen a tad, bonds are ticking along, and given time, the diversified portfolio will do a good job.
But at about 3% above bank rates, not 25% or 50% or more ……………………….
3% more can be a lot
· $50,000 invested for 20 years at 3% more than a bank
· $1,500 pa more x 30 years = $30,000 more than bank
· $167,000 at 3% more over 20 years
· $5,000 pa more x 20 years = $100,000 more
A year later ……………………………………
I asked him again for an overview, and he said a properly diversified portfolio is investing.
And investing heavily into a single share market that is booming is gambling.
What investors need to do is decide if they are investors or gamblers.
If they are investors, then they should start out by making haste slowly.
No free ride
Some of my key phrases from last week apply;
· What does common sense tell me?
· If in doubt, do half
· There’s no free ride
· If it’s offering big interest or returns , there will be big risk
· Diversification is free
So big NZ share market losses in 1987 were avoidable
In fact global markets recovered within few weeks.
Had Kiwis been properly diversified, they would not have felt any pain.
And big Chinese share market losses in 2015 were avoidable
Global markets did not fall like China.
Had the Chinese people been properly diversified, they would not have felt any any pain.
Supplied by Alan Clarke, financial & retirement adviser, & author.
His 2nd book “The Great NZ Work, Money & Retirement Puzzle” is now available on line at www.acfs.co.nz
Alan is an independent authorised financial adviser (AFA) FSP26532
His disclosure statement is available on request and free of charge.