Spicers senior financial adviser Jeff Matthews gives his top five tips on how to avoid some common pitfalls.
KEY POINTS:
The secret to investing is to buy low and sell high but investors should remember there are no guarantees when it comes to investing.
PLAN CAREFULLY
Designing an investment strategy is similar to designing a house. You want to start with a solid foundation, then you can start building the walls and roof, rather than worrying first about whether you should have aluminium or wooden window frames.
What do you want and need? When do you want to retire? What kind of income do you need? Once you know these answers, you can start to develop an overall investment strategy, and can determine how much should be invested in growth assets (property and shares), and how much should be invested in income assets (fixed interest).
Once you have the asset mix sorted out you can then choose thebest investments in the various categories.
DIVERSIFY
Lack of diversification is a common mistake made by investors. Don't put all your eggs in one basket. The recent turmoil in finance companies has highlighted the lack of diversification for many investors - putting $20,000 into five different finance companies is not diversification.
If you have a mix of investments, such as property, shares, fixed interest and cash you are more likely to even out your investment returns over time, even if your investments can be affected by short-term volatility in a particular sector.
You need to look at a mix of investments with different styles, managers that invest in larger companies, smaller companies, or those that have a growth or value style of investing.
DO THE RESEARCH
Investing blindly is asking for trouble. Do your homework. A lot of investors spend more time planning their holiday on the internet than researching their investments.
A good place to start learning more about finance and investment is www.sorted.org.nz, which is a free independent money guide run by the Retirement Commission. It is full of calculators and information to help you manage your personal finances. For more investment information, such sites as www.nzx.com or www.asx.com.au are valuable sources.
KEEP CALM
Greed and fear are two emotions that drive investment decisions.
People need to understand the difference between investing and speculating. Many of the investors in the New Zealand sharemarket in the 1980s were speculators.
They bought and sold shares in companies without knowing what those companies did.
Good investing requires self-discipline and a long-term perspective. It means not getting greedy when markets are booming, and not getting spooked when markets are falling. A common mistake is selling out of investments when they experience a temporary correction.
After two or three negative years from overseas share markets, together with a strongly rising NZ dollar, it was very tempting to quit several investments in early 2003 and put the money in the bank (and, in some cases, into finance companies).
People who did that locked in their losses, and missed out on the rise of investment markets over the past five years.
GET INTO IT
The biggest mistake anyone can make is failing to invest at all. Returns from the share market and property markets have usually outperformed fixed interest investments, and yet people often think investing is too difficult so they don't do anything.
People who start investing early in life would see bigger benefits from compound interest. Retirement is decades away, so why worry about it?
Be smart, start early. If you want to have $1 million at retirement age (assuming age 65), you can do it from age 20 by saving $6262 a year. Wait until age 40 and its $20,952 a year; wait until age 50 and its $46,342 a year. This assumes that your investments grow at 5 per cent a year above the rate of inflation.
While repaying debt is often the best investment, the introduction of KiwiSaver with tax incentives and employer contributions, means there is some free money which investors should take advantage of even if their first priority is to reduce debt.
