Dive into Diversification
Sep 25, 2016
If you would prefer to listen to me read this blog post, please click on the play button.
It has taken me quite some time to learn about diversification and the impact it can have on my investing. But it turns out that I was actually diversifying even when I still had debt. When we got our mortgage we almost put it all on a fixed interest rate for a certain number of years. This would have given us safety and certainty as we were big scaredy cats about taking on debt. We would know what our repayments were going to be for some time into the future. This was a big debt to us and we were worried about our ability to pay it back. But at the eleventh hour we made a wee tweak and ‘floated’ 30% of our mortgage. Scary stuff here folks, what would have happened if the interest rates took off? It was my first lesson in risk. Were we about to commit financial suicide?
Short answer was NO. We NAILED that floating section of the mortgage because it allowed us to put larger amounts on it instead of a fixed weekly amount. Every spare cent was thrown at it and before we knew it, it was GONE. Then we had to twiddle our thumbs with the remaining debt, making regular fixed payments while waiting for the fixed term of our mortgage to come up for renewal. Yawn.
Without realising it we had diversified and both these repayment routes had very different consequences. It turned out that we were pretty good at paying off debt and we had nothing to worry about after all. But we were left tied into this fixed portion of our mortgage and had to just roll with the consequences (i.e. longer period to pay off our loan, more interest paid over the long term). For those of you who are interested, when it was time to review our mortgage we then talked the hesitant banker into putting the remainder of our loan on what is called ‘revolving credit’. Over the next couple of years we then nailed that debt as well.
Diversification has consequences when it comes to debt and then saving. In my case it was a matter of learning by doing. It annoyed me that we missed the chance to pay our debt off faster, but lesson learned!
Once we turned the corner from repaying debt to beginning to save my strategy used to be about “only investing what I could afford to lose”. It was all a bit of fun to me and it felt like play money since I was no longer giving it to the bank each week. But over time as the cents turned into dollars that way of thinking began to scare the hell out of me and I realised that my strategy is something a gambler would use, not an investor! We had worked too hard to face the possibility of losing it all. But investment in anything is risky and there will be gains and loses. I by no means want to lose it all so I’ve learned to accept the possibility of volatility and work within it while growing our cash.
In New Zealand we suffer a potentially unique problem. We are a very small country and there appears to be only three degrees of separation between us all. We all know people who know people who have had some terrible financial disaster befall them and most commonly we remember the bad bits. These are the bits we share in our ‘investment tips’ to our friends. We also tend to avoid talking about our successes, as Kiwi’s don’t tend to like people who are too boastful! What you can and can’t talk about is a fine line.
What appears to underpin all investing decisions is the looming doubt that you have got it terribly wrong and all of your hard earned money is going to disappear in a few different ways, all of which can be backed up by 'REAL' examples, as told to you by a mate of your friends friend. Here are some possible scenarios:
A. Financial armageddon. It could be the 1980’s all over again. “I remember when the bank took my uncles farm...” You wake up in the morning and the world has run out of money so your shares are worth nothing and the bank has no money left.
B. A sleazy scam artist slippery snake oil salesman will trick you into investing into a scam so profitable you will be rich beyond your wildest dreams (but don’t tell anyone, it is a secret OK?). “I have a family friend who bet their house on such a venture. And lost it all…”
C. Your partner develops a gambling habit and loses the lot. Or even worse, you do! “My brother in laws, sisters’, friend spent the lot on the one armed bandits…”
D. Property market dive bombs and your loan is greater than the value of your house AND interest rates on your mortgage are at 30%. “I was talking to a guy down the street last year and he barely escaped with the clothes on his back…”
The list could go on.
I truly believe this is why we Kiwi’s don’t push the boat out and try things, other than housing, when it comes to investing. It is our collective history of failure (real or imagined) that holds us back. But let us remember that we have had great successes as well and punch above our weight in so many areas.
Therefore when I am thinking about what to invest in I do a couple of things. I look to the past for sure but I keep in mind that you can’t really predict future returns on past performance. I read websites, blogs and listen to podcasts widely, talk it over with intelligent people and constantly look for opportunity. This has allowed me to create a range of investments and always in the back of my mind is the view that I’m unlikely to lose the lot and what goes down will most likely go up as well. I don’t put all of my free range, organic grass fed, chicken eggs in one basket. Instead I have an egg from a Chicken, Duck, Quail, Kiwi, Tui, Blackbird, Emu, Crocodile and Penguin (I’m still looking for the elusive Moa egg). Each have different needs, habitats and growth rates and will mature at different times. What a lovely analogy!
My investing is a constantly shifting target and since we paid the house off the list below has been evolving over about ten years. And, as I’m human, I’m constantly unsure if I’m doing the right thing! My strategy remains to be spreading the money around and not have too much in one place, steady saving like a little squirrel saving its nuts for winter and looking long term so we can ride the ups and downs of things over many market cycles.
But I’m constantly worried about also spreading myself too thin as well. Money makes money and there is not much point having teeny amounts here, there and everywhere. HOWEVER, it is always a pleasant surprise when I start something new with only a few thousand, forget about it whilst feeding into it regularly and then take a look at it and see how much it has grown. I worry it is not enough but then when I look back at what we have achieved in ten years with small amounts it is remarkable. I love compounding interest and dividend reinvestent!
Now, because I’m among friends here (that’s you) and the point of this blog is to ACTUALLY SHOW how I go about things in the hope that others can learn, below I’m showing what I’m up to. Like a little squirrel I typically syphon $1,000 - $2,000 of cash into these funds each month. Additionally, all interest/dividend payouts are reinvested as well as any lump sums we receive. Slow and steady wins the race people. Drip drip drip.
Property
I remain constantly unhappy having so much money tied up in our house. Despite really enjoying learning a lot more about property investment recently, I’m sticking with one house for now. Having lost our home due to the earthquakes in Christchurch and suffering for two and a half years to release the cash from it I’m reluctant to tie up more money somewhere where it is potentially hard to get out. And on the bright side, my house is lovely to live in with my beautiful whanau (family) and many visitors.
Index Funds
Drip drip drip is my strategy here. Every month a set amount goes into this fund on a direct debit and buys more Smartshares invested in New Zealand’s top 50 companies. Some months it buys more units, some months it buys less as it all depends on the share prices at the time.
Managed Funds
I drip drip drip an amount in on a monthly basis into an International Share Fund managed by ANZ Investments. If you want to talk about volatility the Investment Statement lists its best year performance in 2006 as 46.93% and its worst year performance in 2003 as -45.08%.
Bonus Bonds
A weekly flutter here! Still waiting to win something... It is my ‘Lotto’ investment, whereas if I don’t win, at least I get my money back. I never let it go over a certain amount, I’m sensible enough to pull the cash out and actually make it work for me somewhere else.
Meridian Shares
Yes, we are the Mum and Dad investors who bought in. Happy so far. I never bought any more, nor have I sold any. We receive dividends that I reinvest in other places.
KiwiSaver for all!
Whether employed or self employed we have always made additional monthly contributions into each of our funds. Balanced Growth funds for Mr and Mrs Saver and Little Miss Saver is in the riskiest growth fund. She can hack it, her appetite for risk is high when she does not realise where Mummy has her money invested! If on the other hand I try to borrow $5 out of her piggy bank there is an uproar.
Gold!
It currently makes up 5% of our investment. I’ve bought it over time so have averaged out the cost of purchasing it. The price is frequently up and down at the moment. Always tempted to buy more...
Term Deposit
I usually have one on the go but as one has just matured I’m still looking at reinvestment options, I’m most likely to reinvest a smaller amount into a two year term and put the remainder somewhere else. The rates are soooo low :-(
Air Future Ltd
While writing this I received an email from this company. I thought it was junk. Then I remembered that ten years ago we had a hot tip to buy shares in a company called Indranet. This morphed into Air Future Ltd. Regardless of what it is called our share value is currently sitting at ‘stuff all’. I can’t sell them because they are worth nothing and nobody would want them so they just sit there in the hope that one day they become “so profitable I will be rich beyond my wildest dreams”...
Cash
Always have cash on hand to buy the groceries and fuel up the car. And take a holiday…
So, there you have it. For better or worse the above sums up what diversification means for me. But for an unqualified inguesstor, we seem to be doing OK. Although I have friends who are direct investors and actively watch companies and share prices I tend to take the more hands off approach of Index Funds, Managed Funds etc. It all seems to be ticking along OK so far, with the odd blip that until writing this I had forgotten about!
But don’t just read this and take my word for it, diversify your reading and remember I’m not qualified in any way shape or form to give you investment advice. I’m seeking to demystify investing and give people the courage to give it a go. The first step is to pick up the phone and ask for some information or jump onto a website and start things yourself. The beauty of it is that you don’t have to be a staid and boring businessman to get things moving. Anyone with a few coins to rub together can get involved these days, you don’t need big sums to start. The key though is to JUST START SOMETHING and before you know it you will look back and say, WOW I remember when I read Ruth’s blog back in September 2016 and look how much I have saved now! Do it, do it NOW!
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