Many Investors Miss the Boat

After many years in the industry, it is always frustrating when investors or potential investors miss the boat.  The past few years have seen great returns for those investors who had fully diversified investment portfolios.  Indeed, the past financial quarter produced after tax and fee returns of greater than 10% for many clients. For the full financial year, net returns of greater than 20% were not uncommon. But these are very much short term investment returns, and we should focus on a much longer time horizon.

Too many commentators have been negative about the managed funds and investment advisory industry for a number of years.  What they have done is a great disservice as they have scared off potential investors.  There is no doubt that may have invested and the investment of choice has largely been property.  Property can be a great investment.  Like most investments you maximise returns by buying low and selling high. 

Seldom do all investment sectors perform well.  The past few years have been exceptional with property, shares, commodities, fixed interest and cash all performing at above “normal” levels of return.  What investors should prepare for is a return to more normal levels of return and the fluctuations that they could expect along the way. 

Short term fluctuations in investment prices have a real psychological influence in how much investment risk can be tolerated by investors. This is not such an issue with residential investment property as it is not priced on a daily basis, although there is the inevitable investment noise from market commentators. For example, as reported in this week’s Beacon, a number of vendors have reduced their asking prices by around $20,000. This is not really a concern if you plan on holding the property for another five years. It is a completely different story if you are selling because you need the money now.

A price reduction of $20,000 on a property for sale in this area, probably equates to a price fall of around 5%. But the initial asking price in the first place was only set by the vendor and the real estate agent. Quite clearly this was not the price that a willing buyer was prepared to pay otherwise the house would already be sold. Share prices on the other hand, are based on supply and demand. They can be quantified on a real time basis unlike property.

If the sharemarket in NZ fell by 5% in a day, this would be headline news in most papers, and no doubt it would be the lead story on TV news.  What is more disturbing is that there would be a loss of confidence and the falls may continue for some time.   Contrast this with the more typical stock market reporting, when a good day is a 1% rise and a bad day on the markets is a 1% fall in the index.

Market noise is one of the real obstacles when it comes to successful investing. The reason for this is that it dwells on investors’ emotions. To be a successful investor this needs to be overcome. Investment boundaries need to be defined. That is why we need to develop suitable long term investment strategies to overcome the short term obstacles that inevitably are encountered in most investment journeys. 

Next week, we will continue with the theme of developing long term investment strategies that can overcome investors emotions.