Back to Basics

Wednesday, October 23, 2019
Back to Basics

Written by Hudson Adviser Ivan Fletcher

This is a timely reminder of some healthy fundamentals when it comes to investing. 
These messages are ideal for first time investors but they also apply just as much to long time investors and retirees. 

1   Maintain a Cash Buffer - for the unexpected emergencies

Life happens and sometimes we need access to funds did not anticipate.  Given that investment markets are volatile, you don’t want to face the scenario of having to sell investments (shares or property) just at the worse time when prices are down.  So before launching into investments to escape the dreadfully low interest rates, first ask yourself do I need this money for something in the next three to five years. 
If you don’t the consequence could be selling investments at a loss or taking on costly debt if you run into trouble, such as the loss of your job. 

If you have high interest debt such as credit cards, you should repay these first and then build your cash buffer. There is no point saving cash at 1% whilst paying 18% on a credit card balance.

2   Set Financial Goals & Objectives

It's important to set yourself a budget and a course for what you want to achieve.  You can’t expect to achieve your goals if you are living hand to mouth and only.  

Most of us don’t buy our first home without saving the cash for deposit first.  Whether it be a deposit on  a property or saving for a holiday, if we don’t set the goal and a means by which to achieve it, it doesn’t happen.

Same philosophy applies in saving for retirement, if we don’t have a plan for what our lifestyle looks like or how much it is going to cost how can we know if it is achievable?

‘Failing to Plan’ is ‘Planning to Fail’. 

3   Make Diversification a Priority

Owning a broad portfolio of asset classes, such as property, Australian stocks, international stocks, cash and fixed interest, is less risky and more likely to produce satisfactory, consistent returns over time.

Having all your shares tied into just one or a handful of stocks (no matter how much faith you have in the company)  can be an earthquake waiting to happen. Sometimes over exposure can be for the right reasons – eg you jumped on a winner early and have seen it blossom to the point where it is now your biggest asset or perhaps you work for a company that issues you share bonuses that have built up over time).  These are great outcomes, however in this scenario your greatest asset has become your greatest risk.  and you should consider reducing your exposure. This will require evaluating the CGT consequences.  Remember paying tax on gains is far better than the alternative of copping a loss. 

If you're just starting out with a small amount of capital, I recommend investing in a diversified portfolio or product such as a managed fund that is already diversified. It will provide you with a more consistent return and significantly reduce the risk of deterring you from investing for the rest of your life.

4   Avoid Knee Jerk Reactions and Impulse Trading  based on Media Headlines

It's natural to want to do something rather than nothing when we are pumped with media headlines.  Mostly we are Long term investors (even in retirement) and what happened in the markets today is unlikely to be a key factor in 20 years time. Further by the time a current headline reaches you, the market has already absorbed that news.

A good example of this was the announcement of both BREXIT for the first time and Trump’s presidency win.  In both cases the share markets immediately reacted negatively with global share markets falling in the immediate hours and days.  Anybody who sold off exposure in fear were burnt as the market then settled over the coming weeks and months and produced substantial gains.

Those who alter their position continuously are likely to see their performance heavily impacted by transaction costs. 

5   Do not Panic during Market Corrections

This is the most difficult of all. If you have done everything right and you have diversified, yet there is a large share market corrections across the board and your portfolio still drops by 20% to 30%, it hurts.  

This is the toughest time in our investment cycle but it is a greater risk to jump out than hold your ground. 
If you have done everything else right and your Long term investments are exactly that (ie not required in the short to medium term) take solace in the history of long term returns are positive.
 
At the depths of the GFC in 2009  those that sold out and caved into fear missed out on the very significant first stage of recovery that took place  which gives rise to one of Warren Buffett's investment commandments : ‘Be fearful when others are greedy, and greedy when others are fearful.'

In March 2009 the share market bottomed from the GFC.  Academics have advised that is the exact month where the most people moved from shares to cash (including in their super funds) hence creating the bottom.  If you are maintaining a long-term outlook as Mr Buffett says the best times to add to your investments is when everyone is panicking.  Don’t be the one jumping out at the bottom creating the opportunity for someone else to make money at your expense.



Reading : Eureka report  15/10/19

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