I was thinking the other day that you can be a great surfer at age 22 but it is unlikely you would be a great investor – you just haven’t been around long enough and some skills just take more time to develop.
Investing is both an intellectual exercise and an emotional one and it takes time to build capabilities at both levels. It also takes experience of different market conditions to be convinced of the benefit of that experience. The underlying key to success in investing is not just to grow your portfolio, but to avoid mistakes. By steering clear of pitfalls you can preserve your capital in the bad times and work your gains in the good times.
Here are five investment tips that I have gained over several market cycles
You have heard it before but a diversified investment portfolio is still the best way to avoid a catastrophe when markets don’t perform as you expect. If you invest in a concentrated area and it performs poorly, your portfolio will take a severe hit. I often say “the impossible happens with alarming regularity”. It is important to diversify at both the asset class level and within the asset class. What does that mean in practice? Don’t hold all of your portfolio in one asset class; for example, just Australian equities. If there is a rout in equities, you will suffer acutely. Within the equities asset class, don’t just hold Australian banks, diversify into other industries. Likewise, if you use managed funds, consider several managers with different investment styles.
2. Don’t be scared
Investing is emotional. When the markets are bad and the media is in a frenzy it is easy to become scared and make rash decisions. You need to make your best decisions when times are toughest. Slow down and analyse things rationally. Often times when you are thinking of selling because markets look weak, it could be a good time to buy because they are at their cheapest. Likewise, investors often look to “take profits” after a strong rally because they are scared to lose their paper profit. Be careful not to cut off a well-performing portfolio, it might continue to perform well for many years to come.
3. Don’t confuse structure with investment
Remember that structure of investment is different to the actual investment. I hear people say things like, “I think I should just put my money in the bank at the moment rather than into superannuation given that markets are volatile”. Superannuation is a structure, whereas a bank deposit is an investment. You can invest money into different structures (your personal name, your family trust, your super fund) and then decide what investment to make (into a bank deposit, into shares, into a managed fund, into property). The two decisions shouldn’t be confused and can usually be made with relative independence.
4. Consider the tax performance
The topic of tax is related to point three, structure and investment. It is important to consider the after tax performance of your investment. Be careful here too. This doesn’t mean that a fund or stock that pays high franking credits is great. A high growth stock that benefits from a 50% discount on capital gains can be a better option. A fund with a proportion of its distribution paid in tax deferred distributions might work for you. The message is – consider the whole of the return profile of your investment including the tax components and seek advice if needed to understand this area better.
5. Get rich slowly
Urban legend always offers the story of the lucky investor who bought the penny stock and made a fortune. The crafty investor craves the satisfaction of starring in that role, but the reality in my experience is very different. True I have met one or two well-connected investors who, with a lot of experience and the right connections, have got in on the ground on some start-up businesses at pre-IPO level and done quite well. But I have met more investors, many more, who have lost significant money investing too much in this stock and that based on a friend’s hot tip or a whim and gone on to regret it. Accumulate wealth slowly by well thought out, considered investment decisions into a diversified portfolio that is well constructed. If you plan well you can build a successful portfolio over time that will hopefully meet your goals and avoid the pitfalls that drag you down on the way and that could set you back a number of years.
The bottom line is, follow these guidance steps but always seek advice if you need further help. At Blueprint Wealth, we offer financial advice that is right for you, no matter what stage of life you are at. Contact us to set up a plan that is right for you.
*Greg Major is an Authorised representative and credit representative of Blueprint Planning Pty Limited (ABN 78 097 264 554), trading as Blueprint Wealth; Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited, Australian Financial Services Licensee and Australian Credit Licensee.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider you financial situation and needs before making any decisions based on this information.