When it comes to being an investor, especially if you prefer to DIY, there is a fine line between being smart and being an idiot. If you stuff up the tiling in your bathroom because you were basically clueless, you can dig it up and redo it in less than a week. You don’t have that luxury with investments – you’ll never get that precious time back. There is a fine line between being smart and silly; where is that line?
You need to understand the difference between investing and gambling. Believe me there are plenty so-called investments that should require a gambling license. Anything that smacks of a ‘get rich quick’ scheme, irrespective of the number of testimonials, is likely to be a ‘get poor quick’ scheme. Anything that is ‘leveraged’ – in other words you only have to put up a small proportion of the investment, but if the trend goes against you, you have to pony up the full amount. Day trading, options, derivatives and all those other fancy products are prime, but probably obvious examples. The odds on those sort of schemes are worse, way worse, than a casino.
If you can’t help yourself and have to try and make that quick buck, make sure it’s disposable income – garbage disposable income. In other words if you lost the whole lot it is not going to impact on your present or future wealth. Look at it as entertainment. If you hit the big time, great! You can retire earlier or something.
So, apart from the obvious, how else can you risk your investments?
Managing your own stock portfolio without spending the time and effort to do the research. Buying on rumour and selling in panic. 90% of the individual investors do not beat the average – even more so in a ‘small’ stock market like ours. The huge investment houses have algorism that can react to the market in a nanosecond. In the time it takes you to place a sell order, they will have bought and sold thousands or millions of shares. Because most individuals don’t have enough money to even start approximating the market (R50m plus) they usually have and hold a handful of shares. This approach is sensible for long term investments, but the risk lies in what you choose. Choosing blue-chips can still bite you. If you’d bought Anglo three years ago you would have missed out on a ? bull run and be down 20%. You’d have been better off putting that money under the mattress. If you aren’t prepared to spend several hours a day researching the market and economy but are hell-bent on a stock portfolio, don’t be a cheapskate, get a stockbroker (it will cost about 1% of your portfolio annually, well worth it).
Chopping and changing your Collective Investments(CI) (Unit trusts). Some platforms will let you do this without restriction, others will cap you to 4 moves a year. While you might have sorted out the risk of not diversifying your portfolio (above) trying to chase every flavour of the day and rumour in the market can significantly impact on your long term wealth, especially if you are constantly switching from ‘cash’ into ‘equity’ and back. The are some days on the stock exchange where, instead of rising like a feather, the market/share/sector rockets up in a couple of days. The chances of catching those ‘rocket’ days are 1000 to 1 – unless you’re already in the market. I’m not saying never change your CI, but there should be a good, long term reason like a significant market change or deterioration in the long term performance of a CI. ( I wrote a blog earlier this year that illustrates that this can happen to even the biggest providers in the market, you can read it HERE or HERE).
Choosing ‘niche’ CIs or ETFs – for example choosing ‘resources’ in the belief it will outperform the market (aka gambling).
Letting fear and greed drive your investment decisions.
So… How do you get investment ‘Smart’?
Each of your ‘bucket’ of investments should have both an OBJECTIVE and a TIMEFRAME. This will tell you how the money should be invested. For example, you want to save for a house deposit in 3 years’ time, and can’t afford a 20-30% dip in the market, then you go conservative – maybe a high income fund or 75%cash/bonds and some equity. On the other hand you want to start saving for your bucket list at retirement in 10 years time, this is a long time frame and ‘nice to have’ so you can afford to put it 100% into equity.
Action: Now that your investments are summarised on one page… Not? READ HERE look at the time frames and objectives of each investment and see if you’re being smart or not…
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Author Dawn Ridler