Here are some tips from three decades of in­vest­ment

The Weekend Australian - - BUSINESS REVIEW - JAMES KIRBY

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.

In­come pro­tec­tion

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.

Com­pound­ing’s cru­cial

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!

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