Posted on

Why Asset Class Diversification is Your Best Defense Against Volatility

Written by R. A. Stewart

When it comes to investing, it is important to invest according to your risk profile. This means diversifying your investments in several asset classes in order that you may take advantage of the highs in each asset class, and at the same time, minimizing the effect of a downturn in one of those asset classes. 

An asset class is a group of companies which have similar characteristics. They react to economic events the same way. A financial advisor will focus on asset classes as a way to reduce the risk and help investors to diversify their portfolio.

Each asset class offers different levels of growth and risk. Some asset classes such as cash in the bank are focused on capital preservation. 

Your choice of asset class has to be aligned with your investment goals.

Equities such as stocks and shares offer potential to make a good capital gain on your money, but are riskier than cash in the bank. 

Physical assets such as Real Estate and Gold offer chances to grow your wealth, but there are downsides to both. Investing in your own home may be a worthwhile investment for you but purchasing an investment property may not if it means that all of your money is tied up in that property. 

Your goals is the one factor which determines which asset class you are going to invest your money in. The question which has to be asked is, “What is the purpose of this investment?”

Once you have answered this question, you are left with your risk profile.

It is important to stress that you can have money invested in growth and conservative funds in different investments at the same time without it affecting your risk profile.

Here is an example:

A person in their twenties has 40+ years till retirement, therefore an appropriate investment for their retirement fund, (Kiwisaver in New Zealand)  is growth or balanced funds.

That same person may be saving up for a car and may have less than 12 months before they have saved enough for their purchase. Investing in conservative funds is right for them, though as they get closer to the time they require the money, depositing it in an ordinary savings account may be the best option.

Time is the major factor to consider when setting your money goals. The person who has time on their side is able to invest more aggressively into growth funds because they have more time to recover from a market downturn.

This does not mean that you should invest haphazardly, but rather taking calculated risks. The beauty of investing in managed funds is that your funds are invested on your behalf by fund managers and it is their job to ensure that your investment returns a profit. 

Cryptocurrency such as Bitcoin, Ethereum, and Dogecoin are an asset class, albeit, a risky one with the potential for high returns. If you are going to get involved in this then only do so with discretionary spending money. The same applies to investing in anything which is outside of your risk profile. 

You could be aged 70 or 80 but still fancy investing in growth funds. Do this if a market meltdown is not going to affect your lifestyle. New Zealand financial advisor Frances Cook has a formula for calculating what portion of your portfolio should be allocated to shares. You simply deduct your age from 100. 

I do know of some folk who do not follow this rule, and I am one of them. My view is that I may avoid the effects of a market meltdown if I followed Frances Cook’s formula, but then I am taking advantage of a buoyant market.

Its a decision investors must make for themselves and if it all turns to custard then you have only yourself to blame. 

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

Posted on

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

Posted on

Which company shall I invest in 2025

Written by R. A. Stewart

Drip feeding money into the share market is made possible for the ordinary man and woman who would not have considered themselves as investors. The advantage is that it increases their financial literacy and their wealth. I have used a strategy for investing; one that works for me; this is it:

Each year I choose one company, a New Zealand one and I drip feed money into this company throughout the year. That way, I will have bought shares at the lower price when they are down as well as when they are up. This is called averaging.

Some folk might be asking, “Isn’t investing in one company putting all of your eggs into the one basket?

That is a fair question!

Investing in Sharesies is just a part of my personal investment strategy. It is basically a string to my financial bow. I certainly would not recommend anyone to invest all of their money in just one company but to at least buy managed funds or as they are called in America, Mutual Funds.

Managed funds allow anyone of any means to diversify their portfolio across a range of industries. This all helps to minimise risk.

As I said earlier, I am using a strategy with Sharesies to drip-feed money into the share market, one company per year. The stocks I have done this with so far are Genesis Energy, Spark, Fonterra, Fletcher Building, and PGG Wrightsons.

For those who are unaware of what these companies do, Genesis is a power company, Spark, is in telecommunications, Fonterra sells dairy products, Fletcher Building is in the construction industry, while PGG Wrightsons is a retailer selling farm and agriculture products.

All of these companies are considered household names in New Zealand.

Fonterra has been the best performing stock this year. They export dairy products to various countries, namely China. PGG Wrightsons is the poorest performer. I would not have normally invested money in a retailer in this day and age of the internet but agriculture is what is known as a recession proof industry. As long as there is a farming industry there will always be a demand for the products that PGG Wrightsons sell.

Fletcher Building has not done as well as I would have liked. They are an iconic New Zealand company.

Spark is a telecommunications company. It was previously called Telecom. They are a sold company. 

Which company for 2025?

I was thinking of going for a bank, however, all of the major banks in New Zealand are Australian owned and I want to invest in New Zealand companies. I could invest in another power company such as Contact Energy, Meridian Energy or Mercury Energy. 

Restaurant Brands is another option, but I am not too keen on investing in the hospitality industry. Having said that, KFC will always be popular. I could invest in a retirement home. Ryman HealthCare are a retirement home company. This industry has problems attracting staff which has hindered it’s progress. Still, the baby boomer generation are getting to that age when they are moving into these places.

About this article: The opinions expressed in this article are of the writer’s own opinion and may not be applicable to your personal circumstances, therefore discretion is advised.

 

Start investing on a shoestring

Sharesies makes it possible for anyone to get into buying and selling shares. It is an online share market platform where you have the option of purchasing shares in individual companies or in various funds (managed/mutual funds). You can even start with $5. This is a no brainer because it gives investors young and not so young the chance to improve their financial literacy. There is certainly no substitute for experience when it comes to learning and this is applicable to everything else, not just investing.

Join sharesies here: https://sharesies.nz/r/377DFM

Posted on

Share consolidation

Share consolidation-what is it?

One term you do not hear very often is share consolidation. It is a term seldom used because not many companies have used this as an option. This article sheds more light on the term. Hopefully I have explained it well enough in terms that even the novice investor will understand.

Share market price increase may be misleading

If you are a casual share market follower and notice a particular company’s share price has jumped up in price suddenly and you are thinking, “What have I missed out on,” then it all may not be as it seems.

Let me explain.

Years ago around 2001 I think, I owned some shares in Air New Zealand. The company almost went broke. The company almost went bust. It was the government who bailed them out. The share price went from about $1.95 per share down to 14 cents per share. The share price increased a little but still only a fraction of what I bought them for.

What the company then did was increase the share price but you owned fewer shares.

This is how it works:

For the sake of simple mathematics, let’s assume company xyz’s share price is 20 cents per share.  xyz then decides to increase the price of the share to $1. 

If an investor owned 1000 shares at 20 cents, they will now own 200 shares worth $1 each.

Unless you are a follower of the share market you may be unaware of this actually happening. 

I don’t know how often this situation occurs but it may pay to do your homework if a particular share increases dramatically for no apparent reason.

What I have just tried to explain is known as reverse stock split or share consolidation.

This makes the company more attractive to investors. They may hold fewer shares but the real value of the total shares in that particular company is the same. It is just that now they hold proportionately fewer shares.

Share consolidation can be viewed negatively by investors as a company in trouble and this could impact the share price.

One reason why a company may choose share consolidation is that if it’s shares fall below $0.50 for 30 consecutive days then it will be delisted. This is applicable to the New York Stock Exchange and there may be different rules for other countries. 

Another benefit of share consolidation is that it will mean fewer share certificates will need to be printed which will reduce costs.

ABOUT THIS ARTICLE

You may use this article as content for your ebook or website/blog. The information may not be applicable to your personal circumstances therefore discretion is advised.

 

www.robertastewart.com