Alan Clarke is an authorised financial adviser with 24 years experience in the finance sector
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 is 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 two percent more per year than a deposit at a bank.
So $100,000 at two percent pa more than cash/bank equals $2,000 pa.
Not much?
What about $2,000 pa over 20 years equals $40,000 more than cash in a bank! Most people, especially when retired, need this extra return.
Some people prefer do-it-yourself, but research shows that DIY investors in the US from 1998 to 2008 made 3.9 percent pa, whereas holding the top 500 shares (the S& P 500) made nine percent 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 so easy to see) fees.
2012 forecasts and reality
The general view expressed by the media in December and January was “buckle up, 2012 promises scant comfort for investors”. Yet markets in 2012 have opened strongly.
Why such a good start? Europe can hardly be described as being out of the woods, but various creditor agreements over Greece has eased nerves. Recently Spain and Italy have been able to borrow at lower interest rates than in late 2011, a sign that the big institutions and lenders think things are getting better.
In the US data shows signs of a turnaround with an improvement in employment, manufacturing orders and a climb in consumer confidence. In addition US companies and many others around the world reacted to the global credit crunch by cutting every cost they could. It is of course Europe that is scaring everyone. Will Europe solve its problems? The general consensus seems to be that Europe will muddle through.
Just as it would be wrong to assume all is now fine in the global economy, investors would have been just as wrong to listen to the media in December and January, and miss out on the good opening returns in 2012.
However a prudent person might say “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 three months. There are lots of variations of this strategy can be used.
Every investor should, at the outset, establish his or 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 percent in bonds and 40 percent in shares.
Summary
• Most of us need a higher return from our money, and much more diversification too
• Don’t wait for good times, and pay dearly. 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 look at moving to a growth or balanced portfolio.
