Here are some tips from three decades of investment
In the unlikely event you’ve missed it, we’re close to the 30th anniversary of Black Monday — October 19, 1987, when we saw the biggest one-day sharemarket crash in history.
It’s also a personal landmark for this columnist because it happened just days after I started work as a financial reporter in Melbourne.
Today I want to try and list some of the personal investment lessons I’ve learnt since that momentous period, both for the markets and myself in late 1987.
As an immigrant in the 1980s, I was scarcely aware that in my early 20s I had no financial security: I had no superannuation, no property and no insurance. But I did have a job as a financial reporter. On the day of the crash I was fascinated but hardly disturbed. After all, I was 25 and I had no money.
The alarming part of the story is that seven years later, when Black Monday was already a distant memory, I found myself thinking of buying a first house and having a family, and I still had virtually no super or investments.
The difference in the mid-1990s was that I was all too aware I lacked financial security. In fact, I was facing a rising sense of dread that I would never be able to afford even the basic elements of a decent lifestyle.
Perhaps in common with many people of my generation, there has been two big investment challenges in my life. The first is that I started very late. The second is that the torrid years of the GFC from 2008-10 greatly upset my mature-stage financial planning.
Long grinding downturns are much harder on the investing psyche than the shocking but rapidly repaired damage we saw in 1987.
Here are 10 ten things I know now that I wish I knew in 1987:
Markets will crash
Warren Buffett says the first rule of investing is never lose money. It’s one of those terrific old tropes from Buffett and for most people it is a fantasy.
Buffet does not make money on every deal, but he does finish up at the end of the year with more than he had starting out. As an investor you have to be prepared to lose money and if there is a crash you will lose money. Remember that on Black Monday 1987 the market crashed 23 per cent in a day!
Nobody escapes unscathed from downturns like that. As a committed investor you have to accept that there will be upsets along the way.
Home’s no investment
Investment professionals view investable assets as the money you have outside of the value of your home. The way they look at it is, unless you sell your house and rent, it is not going to be an investment asset. Most people never do that.
You don’t treat it as an investment; if you did, you would spend nothing on it and wait for the value to rise and trade up. But we spend our money as homeowners rather than investors on renovations. That’s all fine, just don’t build it into your investment plans.
Better to buy early
It seems as if every wave off firsthome buyers since 1987 is aghast at metropolitan house prices — and spend much of their 20s talking about how they will never buy — they then buy in their mid-30s when the houses are dearer and they have less disposable income. We bought our first house in inner-city Melbourne for what now looks like the comical sum of $186,000. But the citywide median at the time was $129,000. What’s more, interest rates were almost 10 per cent. It’s never easy.
Truth about fixed rates
Many people now fix mortgages and with interest rates still below long-term average levels of 6-9 per cent, it can be a very good move.
The advantage of fixing is knowing in advance how much you pay — I have fixed at rates as high as 9 per cent and at as little as 3 per cent — I have no regrets.
But if you fix remember two things: first, don’t do it to outsmart the bank, they invariably win — rates are set by experts who have better research than you. Second, if you always fix, say, over threeyear periods, then you will smooth out your own payments over the life of a mortgage — but moving regularly between fixing and variable will cost you more.
Super is superb
Believe it or not, I cashed out my super in 1990. You were allowed do that back then under certain rules and I was privileged enough to know and silly enough to access. Several years of living in Asia then made sure that by the mid-1990s after working 10 years I still had almost nothing in the way of investments.
If you start super savings late in life it is very difficult to catch up. We have a super guarantee now of 9.5 per cent of your salary so everyone has compulsory super, and it is virtually impossible to cash it out before 65. But you will most likely need to top it, if you want a comfortable retirement. If you can, do it and get the remaining tax benefits that are still in the system.
As stockbrokers can capitalise on greed, insurers may prey on your fears and insecurity. For high salary earners tax-deductible income protection insurance is increasingly popular.
But do you need it? You can have your own income protection fund by having cash savings.
Moreover, many income protection policies are flawed and unsatisfactory. Income protection insurance is a choice — this struck me hard some years ago when I was in the middle of a two-year contract lock-in. I was paying for income protection even though I was legally bound to stay in my job. Income protection is a choice, not a necessity.
Similarly, as people get older and wealthier, life insurance can be peeled back. A million-dollar life policy might make sense if you have huge outgoings on mortgages and school fees, but not when you are past that phase. If you are over 55, and certainly over 60 — the best way to save on insurance is to review your cover.
Have you ever wondered why one in three people on the rich list are over 80?
It’s due to the marvel of compounding — money invested in almost anything legitimate will grow over time. A useful formula to remember is the one I call the power of $500. It goes like this: if you put away $500 each month and invest it at a reasonable expectation of 5 per cent per annum over 40 years, that figure will become $763,000 — that’s compounding. Never underestimate it. In common with buying your home early, the earlier you start seriously investing, the more success you will be due.
Diversification is key
Never put all your eggs in one basket is a mantra of the investment community. I certainly hold to it, but of course it has flaws. Buying my first residential investment property investment just before the GFC hit the sharemarket was for me a powerful and very welcome slice of evidence that diversification works.
But here’s the catch. With a properly diversified portfolio you will never endure disproportionate losses — or get to enjoy disproportionate profits. Take it or leave it.
Get the structure right
When you start investing you don’t pay much attention to structure. Is something held by you or your SMSF (I’m assuming any serious active investor has one) in a trust?
It hardly matters if you have no investments anyway. As things get more complex and your investment affairs widen these issues are very important and it is an area where you need financial advice. If you have important investment activity — a business of any description — explore your options around holding these in tax protected structures. I have held investments inside and outside of trusts depending on what I was trying to achieve at the time.
Remember, capital gains tax remains a major cost to investing.
Luck and timing
It is heresy in investment circles to even mention luck, but you cannot ignore it.
I have a friend who had a health scare in early 2000 and sold her dotcom business in February of that year for a fortune — a year later the business that bought her company was worthless and she was cleared totally of her health problem. That’s luck.
I have another friend who sold a property and put her money — all at one time — into the sharemarket. It was August 2007, two months before the ASX topped out at 6800. Today, a decade later, it is drifting around 5800. That’s bad luck.
You can’t arrange luck, and timing is exceptionally difficult, but in accepting their role in our investment story we will all feel a little better.
These are some very broad lessons learnt the hard way over three decades. Here’s 10 more, a little more precise, but I hope will be relevant nonetheless.
Fees really do matter, but high fees are acceptable if they are matched with high performance.
In the sharemarket brokers will hardly ever tell you to sell. If they ever do, it is perhaps too late.
Offshore diversification in shares makes a lot of sense, but it is still a lot of trouble. If you can get it through an ASX-listing, it is much more efficient.
It is very easy to sell out of a market but it is extremely difficult and cumbersome to get back into a market, not to mention how to time it.
In property, the ability to see or visit a property is really not relevant when it is professional managed. The location is what matters, even if it is in another city.
Private equity can be lucrative, but the odds of picking a single investment successfully are slim. A fund is probably the best entry point.
Biotech investing is very speculative, even the most experienced investors get hit regularly. Buying small biotechs on the ASX is effectively playing in venture capital.
In managed funds, I simply don’t see the point in buying managed funds which hug the indices and charge fees of 2 per cent. You can do that yourself for free.
Hedge funds can be very good performers, but you must understand what you are investing in; otherwise don’t go near them. Only the people running them really know what goes on.
Late night tips from partying stockbrokers almost never work. Be warned!