Are you keen to start investing but kinda scared that you’ll do it all wrong?
Then this post is for you.
Sure, we don’t want to be recklessly plunging our cash into hare-brained, get-rich-quick schemes. But nor do we want to let opportunities pass us by because of vague or ill-founded fears about our own abilities.
So I’ve been thinking about what’s behind this reluctance to get going on the wealth-building road and have zeroed in on two big fears – and how to overcome them.
Fear: I’ll lose my hard-earned money
Solution: Don’t put all your eggs in one basket
Of course, this is everyone’s fear. Humans are wired to think this way, because on a resource-stretched savannah, it was a survival game.
The pioneers of behavioural economics, Professors Kahneman and Tversky, explain that “losses loom larger than gains” when it comes to money (you can read more about it here).
Nearly every investment has some level of risk – it’s the flip side of having returns. But we can minimise the risk, and thereby, the chance of losing money, by spreading the risk across different investments: aka diversifying.
For instance, if you are investing in shares (aka equities), you buy a range of different companies in different industries. Or if you invest in shares, you also invest in some property, so that if one is under pressure, the other is doing ok.
The thing to remember here is that you can diversify within an asset class or across an investment portfolio. Ok sorry for the jargon there … let me explain.
Say you have a shoe collection, divided into trainers, sandals, heels, boots and ballet flats. These sections represent asset classes, such as local and international shares, property, cash and bonds. This is a diversified portfolio. Look, I even made you a diagram!
Then within each section, you have different pairs. So your trainers include Nikes, Adidas and Reeboks, equivalent to having shares in Telstra, Westpac and Woolworths. Like, I would never wear my pink AirMax 90s for actual exercise, while my Reebok Crossfits are perfect for circuit training. Each one has their own risk and reward characteristics.
The important word here is correlation. How similarly do these asset classes behave? Traditionally, when the world feels optimistic, the sharemarket goes up and people make money from it. When that’s happening, bonds are not very sexy: why do I want a 2% yield when I could be making 10% from shares?
Until there’s a downturn (hello, March 2020!) and then everyone’s like ‘oh shit, let’s sell off all those shares and buy some boring old bonds.’ It’s like those middle-aged men who have an affair with a 20-something woman, before realising they actually want the emotional maturity of their age-appropriate wife, and come crawling back.
So, that’s a really long way of saying, bonds and equities usually perform differently, and therefore have low correlation. It’s a way of managing risk.
Within an asset class, you can reduce correlation by having exposure to different sectors. For example, in 2020, shares in airlines and hotel groups had a very tough year, while shares in retailers like JB Hi-Fi and Kogan went nuts, because we all sat at home spending our travel money on air-fryers.
So when you see figures like the ‘ASX fell by 30%‘, remember that’s an average. Some companies fell far and fast, while others stayed flat or went up. (By the way, the market has now almost recovered from that drop and is pretty much back where it started before the bat-soup-induced downturn).
Simply put, when you don’t put all your eggs in one basket, you have a much better chance of not losing money.
Fear: Getting it wrong
Solution: Be clear on what ‘getting it right’ looks like
This is a more vague fear, a general sense of not feeling like you’re good enough or that you don’t belong in this space. As though investing is for men in suits, and there is some serious, secret language that you must learn first.
Well, my friend, that’s what they want you to think. Then they can make you pay for their expertise. The fact is, you can get started with a small amount of money and use low-cost digital tools (check out this post for more ideas).
Another issue is that sometimes we don’t know what ‘getting it right’ looks like, because we haven’t defined our goals.
For example, do you have a clear timeframe for your investment? How important is it that you can access your money before then? What type of return do you want or need to make it worthwhile?
Without being clear on those answers, it can be difficult to know whether you’re going in the right direction. Every type of investment has different pros and cons, different risk/return profiles, and different time horizons.
For example, you could wait a decade or more before an investment property makes you any money (once you’ve accounted for the costs of buying it and the cost of interest on the mortgage). Some never make any money at all. (And some make you a bloody fortune; direct property ownership is tricky).
Shares can make you decent returns, but they can also lose their value quickly when the market goes down. As a result, you should give yourself at least five years to weather the ups and downs of the markets (five years is a rule of thumb – not an exact science). The thing about equities is that they have historically gone up in value, but not in a straight line. Timing is everything, so it’s good to have the luxury of being able to wait out any downturns.
Here’s one more rule of thumb: if someone contacts you out of the blue to sell you an amazing investment, it’s 99.9% sure not to be amazing. If you are offered ‘guaranteed returns’ from something other than a bank deposit, then they are probably not guaranteed at all. If you don’t quite understand how an investment stacks up, because it sounds too good to be true, then it is. Basically, you should trust your gut on these things, remember that high returns come with high risk, and avoid slick sales pitches that come with a high-pressure incentive.
The thing about investing is that it’s actually simpler than many people imagine. There are no quick wins or secret sauces. There is no ‘perfect’ or ‘risk-free’ product. There is basically the tried-and-tested approach of knowing what you want to achieve, over what time frame, and finding a reputable product or strategy that meets those parameters.