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Over caution can be costly when investin

Written by R. A. Stewart

“Never invest in the share market which you cannot afford to lose” is a saying that you may have heard a few times but is it good advice?

It all depends on what you are going to use the money for and how soon you need the money.

If the money is in your retirement fund and you are in your twenties or thirties then you will not need the money for another thirty or forty years and even then you may live another thirty or so years so the money won’t be needed for decades. A share market tumble will not make any difference to your current lifestyle. 

You have time on your side to recover from the lows of the markets.

If however, you are saving for a house deposit and require the money in less than five years then being a little more conservative with your money may be the way to go.

The worst thing which can happen is for you to withdraw your money for a house deposit just when  the markets are down and then a month or two later the share markets have rebounded.

It is all about taking a balanced approach.

There is no doubt that many investors are afraid to lose their money so they invest their retirement funds conservatively. The end result will be that they are left short-changed when they reach 65. 

Worst still, they react emotionally when the markets take a dive and shift their funds from balanced to conservative, then when the markets rebound they miss out on the rises which would have seen their retirement fund recover.

It is time not timing which is the key to creating wealth in the share market. Young people have an abundance of time on their side and the young astute investor can use this to their advantage to create their wealth.

Inflation reduces the spending power of your money and just leaving your money in the bank will erode the value of whatever is sitting in that account. If money sitting in the bank is for everyday expenses or an emergency fund then that is fine, but to get ahead one needs to become a long-term investor.

Your risk-profile is the factor which should determine how much risk you should take. Your age is one factor. New Zealand financial advisor, Frances Cook, says, “Subtract your age from 100, and the answer is the percentage of your money which should be in shares.”

I do know of people who have a much larger percentage of shares than Frances Cook’s formula suggests they should have. One elderly couple I know invests in the share market for the dividends which they use to pay for their health insurance.

It is for investors to decide what level of risk they are willing to take and to take responsibility for decisions they make. 

Investors must get over their fear of loss in order in order to make the most of the investment opportunities available. Playing it safe in the matter of finances and life in general will leave you feeling short-changed, when with a few more risks you would have achieved more with your money.

About this article

The contents of this article are of the opinion of the writer and may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your blog/website, or ebook.

Read my other articles on www.robertastewart.com

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Book Review: Rich Enough by Mary Holm

Written by R. A. Stewart

Mary Holm is a New Zealand financial adviser who has written books on the subject of a personal finance nature for years and her book “Rich Enough? Is certainly a very good book with lots of down to earth information written in simple easy to understand terms.

There are several important points which she highlights and the first one is the importance of starting early. In fact the earlier you start the more money you will accumulate in the long term.

Starting early develops good savings habits which will in turn serve you well during your lifetime. 

The second point is to get rid of any debt you have as soon as possible and staying out of debt. If you are paying 10% interest on your debt then paying off that debt is just like being paid 10% interest on your money. It makes no sense to have money invested at 5% interest when you are paying 10% interest on your own debt. That money is better off in your pocket.

Falling into the Christmas trap can be costly as Mary points out. 15% of New Zealanders have more than 11 people on their Christmas shopping list to shop for and about 27% of them are women who plan to spend over $200 per person on presents. About 17% of people expect to spend over $1,000 on Christmas. Some suggestions on how to reduce your Christmas spending are given by Mary.

A section on New Zealand’s retirement scheme Kiwisaver tells of the excuses people provide for not joining and one of those excuses is “I have not got around to it.” 

This is stupidity according to the author, Mary Holm.

Another reason given is, “My grandma lost it all during the Global Financial Crisis.”

As Mary points out, these finance companies which went under during the GFC lent money to people who the banks considered too risky to lend to so they borrowed off the finance companies and paid higher interest rates. As a result, investors who lent money to these companies received high interest rates.

As the saying goes, higher return often means higher risk.

The importance of diversification is discussed as are the value of different types of investments. 

My rating: I rate this book a 10 out of 10 based on the fact that the information presented is applicable to everyone irrespective of their means. 

To find a copy, go online. Trademe, Ebay, and Amazon may have a copy for sale.

www.robertastewart.com

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Making a killing in the share market

Should an investor try to make a killing on the share market?

That all depends on your personal circumstances because making a killing in the markets involves a lot of risk.

If you have a lot of commitments it will be irresponsible to expose yourself or your family if you have one to financial problems in the event that it all turns to custard.

Attempting to plunge on one stock in the markets is in the same category as investing in bitcoin. It should only be done with discretionary spending money.

You may hear stories about an investor who had all of their money in X stock and made a killing. The truth is that others tried the same thing with Y stock instead and lost everything. As for the one who made the killing, you will never hear about the times when they tried to do the same thing and lost all of their previous gains. Greed get the better of people like that.

One piece of advice for those who want to risk it all by plunging on one stock may want to have a go at the casino instead if you just want to take a punt.

There is no doubt that you will lose now and again (in the share market) but diversification softens the landing. It is a strategy for spreading your risk, a safety net you could call it.

Whenever there is the chance for you to make a capital gain on your money there is the chance that you will make a capital loss but by making calculated risks you can give yourself the best chance of increasing your wealth.

Your risk profile is a big factor. This is your tolerance to risk. If investing in growth funds is going to make you nervous then you may want to exercise a little bit of caution.

Your timeline is the one factor to consider when deciding what risk you are taking. Goals should be split into three groups.

That is Short term goals, middle term goals, and long term goals.

Short term is 12 months or less.

Middle term is up to 5 years.

Long term is longer than 5 years.

The longer your timeline is the more risks you are able to take; this is because you have more time to recover from financial setbacks than someone whose timeline is up to 5 years. 

This does not mean that you should invest all of your money in high risk high return investments if you are young and low risk low return investments if you are nearing retirement or already retired.

A young person may be decades away from retirement but still have short or medium term goals such as saving for a car or house deposit. It all depends on what is the purpose of the investment you are making.

An older person can still invest in growth funds but at a level they feel comfortable with.

The share market investing platforms such as Robinhood and Sharesies are an excellent way for the ordinary investor to get involved in the share market because it can be done on a shoestring. Just drip

feed your way to wealth and have fun doing it. 

There is really no excuse for you not to get started with your wealth building goals. As long as you have discretionary spending money left over from paying your weekly outgoings then you have the seeds to build your money tree.

About this article

The information in this article are of the opinion of the writer and may not be applicable to your personal circumstances. Feel free to use this article as content for your ebook, website, or blog. 

Visit my website www.robertastewart.com for other articles of interest.

 

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