PAPE: HOW TO KEEP YOUR MONEY SAFE
LET me tell you about the most devastating day of my life.
It happened “BC” (before children), when Liz and I visited the “The Happiest Place On Earth” — Disney World, Florida.
It was hot as hell, yet we dutifully joined a line for the rollercoaster that was only marginally shorter than the Great Wall of China. As we waited, and waited, and waited, every so often Liz would say to me: “I’m not sure about this”.
I was having none of it. Besides, I was too jittery with excitement, partly because I love scary rides, but mostly because of the giant bucket of Coke I was slurping (two handed) as I waited in line.
And when it finally came our turn, we stepped up and slid into our seats. The attendant locked down the safety harness with a click: “You’re ready to go!” he beamed.
And that’s when the craziness started.
My wife started hyperventilating:
“GET ME OFF — NOW!” she screamed.
She was flailing, trying to wrench herself out of the safety harness (which was doing its job).
That made her freak out even more.
“I CAN’T GET OUT — I’M TRAPPED!” she screamed at the top of her lungs.
Meanwhile, in the carriage in front of us, a little girl, not more than five, turned around and stared. In the carriage behind us, a loved-up teenage couple sniggered: “O. M. G, like what’s with that Ossy lady, she’s freaking out!” And that was that. The alarmed attendant unclicked the harness. We did our “walk of shame”. My wife sobbing. Me with sunstroke.
THE STOCK MARKET ROLLERCOASTER
Here’s the thing: my wife is one of the most grounded, sensible people I know. However, on that day she let her fear get the better of her, and she panicked.
And after this week on the share market (“The bloodbath continues” was my favourite front-page headline), you may be feeling like you’ve been on a financial rollercoaster. So here’s the obvious analogy:
The share market is like a rollercoaster ride: there are breathtaking climbs, gentle dips, and at least a couple of stomach-churning plunges along the way. And what happened last week was completely normal. The share market has many dips each year, and has a huge plunge about once every decade, before climbing to a new peak. You should expect it to happen. It always does.
Here’s you: “Who needs the stress? I’m not an adrenaline junkie! I just don’t like the stock market. It’s too scary.”
Here’s me: “Well, you need to work out if you want to travel to places like Disney World in retirement, or Wobbly World in Wangaratta. If you want financial security you’ll need to take the ride to higher returns — and historically the highest returns come from the stock market.”
Here’s the second obvious analogy:
When you look at the past 30 years on a chart, it looks like a giant ferris wheel moving up, up, up: A $10,000 investment in Aussie shares in 1988 would be worth $136,000 today — an annual return of 9.1 per cent.
However, investors who lived through it would say it felt more like a rollercoaster: over the past 30 years we’ve seen a recession, the tech wreck, the Asian currency crisis and then the biggest downturn in living memory, the Global Financial Crisis.
Here’s the third obvious analogy:
If you know how rollercoasters work, you close your eyes, grit your teeth and get through it.
Really, the only way you can get hurt (in the sharemarket or on a rollercoaster) is if you do something stupid, and jump off at the wrong time.
In other words, don’t freak out and sell at the bottom of the Big Dipper.
Plenty of retirees did this in the GFC, and they ruined their retirements forever by locking in their losses.
Here’s what closing your eyes and gritting your teeth looks like in real life.
Let’s say there’s an old bloke who retired in 2007. His only investment is Australian Foundation Investment Company (AFIC) shares … which is really a barometer for the broader share market, given it holds more than 90 Aussie stocks.
He decides he wants a stress-free retirement, and the daily updates of the share market are too nerve-racking, and besides, he knows he can’t do anything about it anyway. So he never checks the business papers, or watches the news. Which means he never hears about the greatest stock market crash in living memory. All he knows is that, twice a year, AFIC posts him a nice fat dividend cheque.
Throughout the turmoil of the GFC — when share prices crashed by nearly 50 per cent — AFIC continued to send him the same dividend cheque, regular as clockwork. Yes, AFIC’s share price dropped (and then recovered)
but its dividend didn’t change one cent.
This leads us to two important points:
First, while share prices are erratic, dividends are much more stable.
Second — and this is very important — studies show that more than 70 per cent of investors’ long-term returns come from dividends, not share price increases.
STRAP YOURSELF IN
OK, so we’re nearly done. Yet please allow me just one last tortuous rollercoaster analogy: it’s your responsibility to fit your own safety harness. No one is going to do it for you. Here’s how to do it.
YOUNG PEOPLE UP THE FRONT
Don’t invest your short-term home deposit savings in the share market. It’s too risky. Use an online saver instead.
Other than that, you should be right up the front of the rollercoaster, lapping it all up. And, as you’re about to plunge into the Big Dipper, you should be pumping the air with your fists and celebrating the markets crashing.
Reason being, shares will be on sale, and you’ll be buying them cheap. That’s how you get rich.
MIDDLE AGED IN THE MIDDLE
You probably don’t have the stomach for the big drops. Well, borrowing to invest in the share market is like have a giant bowl of spaghetti carbonara before you jump on the ride: you’re increasing the risk you’re going to puke.
Now if you’re in your 40s or 50s and you plan to be around for another 30 years (or more!), you should be cheering the opportunity to buy shares at a discount.
However, now is the time to review your investments and make sure you’re not giving a financial salesperson a free ride by paying too much in fees. Remember, everyone is on the same ride; some people just pay higher ticket prices.
OLDIES UP THE BACK
Hold on to your false teeth! Better yet, stick them in your pockets because your jowls are going to be flapping in the wind as you go.
In the three years before you retire (whatever age that is for you), I’d recommend you get your employer to put your super contributions into cash. The aim is for you to build up a buffer of a minimum two years of living expenses in cash (less any pension payments). And if you’re already retired, build up the cash buffer now.
Make an appointment to see a financial adviser and get a plan to ensure you have enough money invested to prevent the real risk: spending your retirement at Wobbly World.
Tread Your Own Path!
The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice.