Afterpay might be a spending temptation
For example, if you are in a ship, choose a cabin that is low down and in the centre of the ship.
There’s a trade-off with this one. The higher up you go the better the view but the more risk you take. It’s the same with investing. If you don’t like the ups and downs, choose investments that don’t have a lot of volatility. The downside is you will have lower returns over the long term, however you won’t feel queasy every time the markets move.
If you have the fortitude to withstand the rocky movement, you will be rewarded with higher returns. One of the most fundamental rules of investing is that the past does not predict the future.
What’s done is done and every investment needs to be looked at in terms of what its expected future return is, not how well it has done in the past. Many investors make the mistake of holding on to investments that have dropped in value, waiting for them to increase in value again.
A better approach is to consider the expected future performance of the investment relative to other options. Looking forward helps you prepare for what lies ahead so there are no nasty surprises.
Newspaper headlines are designed to make you feel uneasy. By all means get information on what is happening but make sure it is from a reliable source that is not making statements designed to attract attention or sell something.
Reacting in a panic to news headlines can lead to poor financial decisions that are later regretted. Your investment strategy should be set to achieve your long-term goals. If your goals haven’t changed, your investment strategy shouldn’t need changing, unless it was flawed to begin with. Volatility is just like the waves on the sea. It helps you get to where you are going.
When you get into a boat, you can expect movement. It’s no different with investments. Stay focussed on your long-term goals and don’t worry about what is happening in the short term.
If you change course, it will only take you longer to get to your end point. Hearing others talk about motion sickness or seeing others become ill can make you feel ill yourself.
There is nothing more unsettling than talking to other people who are unnecessarily worried about their investments. Panic is contagious. Talk instead to seasoned travellers who can help you navigate through the rough times. Consult with experts rather than novices who are driven by fear and greed. Don’t worry if everyone else seems to be taking a different approach to you. Some of the most successful investors are those who buy when everyone else is selling. Fill yourself with too much optimism and you run the risk of unmet expectations which will cause fear and anxiety.
Anybody can be a fearless investor when markets are going well.
There is nothing like a market downturn to sort out who is risk averse and who isn’t. Know your appetite and capacity for risk before you start investing to avoid making costly mistakes.
An investment strategy is a prescription for achieving your financial goals. The Kiwi way is to figure things out for ourselves, but when the going gets tough, expert advice can save the day.
A prescription is given by someone with years of training and experience who knows exactly what is needed. There is a cost for advice, but it may be less costly than making the wrong decision.
Liz Koh is an authorised financial adviser and author of Your Money Personality; Unlock the Secret to a Rich and Happy Life, Awa Press. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847.
Q. I’ve recently started using Afterpay and it seems pretty great. Instead of having to pay for something upfront, I simply spread the payments and it’s much gentler on my credit card. What could go wrong?
A.
The most important question to ask is, can you meet all your payments?
If there’s a chance you might not have enough money available to pay what’s due as it’s required, you can be stung with quite high fees.
Beyond that, you need to think about your own habits.
Does Afterpay-ing make you feel like you’re spending less, tempting you into making more purchases than you otherwise might?
How do you use your credit card? If you don’t pay it off in full each month, you’ll be paying interest on those Afterpay payments as they arrive on your card, anyway.
Broadly, I think schemes like Afterpay are good tools to spread the cost of purchases that you were going to make anyway.
They’re not so good if they make you feel you have more money to spend than you really do.
Q. I want to buy a new car. Should I extend my mortgage to do so?
A.
With interest rates so low, borrowing looks very affordable at the moment.
Borrowing against your house can be a cost-effective way to pay for things, but you need to structure it correctly.
Limit the term of the loan. You can do this by setting up a new loan to sit alongside your other home loans, and limit it to, say, five years.
This is important because adding $30,000 to your total loan over 20 years is expensive, no matter what the interest rate.
If you buy a car from a dealer, you may also be able to access finance at promotional rates. Check out what’s available before you commit to a decision.
Do you have a personal finance or consumer question? Email susan. edmunds@stuff.co.nz