It's important to understand what you are investing in. Photo / 123rf
It's important to understand what you are investing in. Photo / 123rf
One of the most enduring pieces of personal finance advice is to never put all your eggs in one basket. It means don’t put all your savings into one investment.
The opposite is diversification, or investing your eggs in multiple baskets, that aren’t carbon copies of each other. Doing thishelps prevent regular investment losses when markets fall. But it also stops people losing their entire savings in scams, which happens all too often. Best to take a hit on 10 per cent of your savings than 100 per cent.
Diversification in plain English means having a bit of property, some different types of shares, and other safer investments such as term deposits. It also means spreading your money geographically so not everything is dependent on the New Zealand economy. Basic diversification could save so many people from financial disaster if they’d just listen.
I mention “carbon copies” because investors sometimes split their money between lookalike investments. The classic example of this was people who spread their savings across multiple finance companies in the leadup to the Global Financial Crisis [GFC]. Most of the finance companies took investors’ funds and lent the money to property developers, many of whom came a cropper in the GFC. When the developers couldn’t make repayments, the finance companies crashed and burned, taking thousands of ordinary people’s savings with them.
It’s important to actually understand what you’re investing in. I sometimes see people posting online who don’t know the difference between a finance company and a KiwiSaver fund. They’re very different when it comes to levels of risk.
Regular conservative, balanced and growth KiwiSaver funds do the diversification automatically for investors. The manager, whether it’s a bank or a private provider such as Mercer or Generate, buys a wide range of investments that make up the fund. Those funds are held at arm’s length. If the provider failed, the KiwiSaver fund would pass to another provider intact.
Another too-many-eggs-in-one-basket investment can be residential investment property. Instead of dozens of different investments, it’s often one or two, which concentrates risks.
People who lose their entire life savings to scammers are also putting too many eggs in one basket. If they’d just limited their “investment” to 10 per cent, the losses wouldn’t be catastrophic.
Scams purporting to be regular investments are becoming increasingly sophisticated. A recent example was Waikato man Chris Hawkings, who thought he was investing in a HSBC-branded “eco bond”. Hawkings lost $150,000 after searching on a scam website that purported to compare term investments. He was fooled into entering his contact details and was phoned by a scammer posing as an investment adviser. There were red flags, such as being asked to transfer his money to another bank’s account, not HSBC. That said, if Hawkings had split his capital between a variety of investments, rather than just one, he wouldn’t have lost it all.
Another risk is scammers posing as financial advisers. They can be weeded out by searching the Financial Service Providers Register (FSPR). If the “adviser” isn’t listed there, run a mile.
Another risky situation is where a registered financial adviser goes rogue. Over the years, too many Kiwis have placed their entire investment portfolio with that adviser offering “investments” that turned out to be scams. Examples are David Ross and Barry Kloogh, who were authorised to give financial advice but ran Ponzi schemes instead. Likewise, rogue ASB investment adviser Stephen Versalko was stealing money from clients in the early 2000s. In each of these cases, investors thought they were investing in regular schemes offering higher-than-normal returns.
I’m even sceptical of financial advisers who have their own bespoke funds instead of selling a mix of more mainstream investments. Those bespoke funds often offer higher returns. That means more risk.
It is crucial to do your diligence. Maintain a healthy level of scepticism always, conduct thorough research, and remain vigilant when considering investment opportunities. If something seems too good to be true or raises suspicions, then don’t do it.
If diversification and due diligence aren’t something you give much thought to, then it might be worth reading about the five Ds of investing. That’s diversification, due diligence, drip feeding money into investments, don’t freak out and, if in doubt, seek advice. The Financial Markets Authority has a good introduction to the 5Ds at: Tinyurl.com/FMAFiveDs
