Sometimes it’s easier to identify bad advice than it is to identify good advice. I find this to be especially true when discussing investing in general- and even more so when talking about investing in shares or index funds.
I thought I would discuss some of the advice I have come across over the years and share with you some of my opinions. Now- you may not agree with my opinions and that is great- I’m no expert and my opinions are open to change- but you have to give me a rational argument as to why I am wrong.
Opinions change over time and with new evidence- after all- I use to believe that property was the only viable wealth-building vehicle available to the average Kiwi.
So if you disagree with anything I have said then let me know in the comments and we can have a discussion.
Stay Away from Shares
They are equivalent to gambling.
I’ve written about the association between stock investing and gambling before. And I don’t know where this belief comes from- but many people still believed that investing in the share market is like gambling.
Is it because every day the market either goes up or goes down, and we have no idea why?
All the news stories talking about the impending crash looming around the corner, with the accompanied personal story of someone who has lost it all- help reinforce the gambling idea.
It’s true- that if you invest in a single share, you have a higher risk investment that is volatile- I wouldn’t go as far as say it is like gambling- but you have to have the nerve to weather the ups and downs.
Day-to-day the price of that single share might go up and down several per cent. But over the long run- if you have invested in a solid company- it will track upwards. Just take a look at my investment in Genesis, which I track with Sharesight.
To reduce some of the volatility of individual shares you can invest in the broader market through an index fund- that’s called diversification inside an asset class. Over the long term, you can generally expect the market to go up around 7-10%. The US500 has averaged around 9.8% and the NZX has averaged 7.8% over 69 years. That doesn’t sound like gambling to me.
Of course, there is no guarantee and no investment is ever risk-free.
You can expect the share market to correct every now and then. I’ve read that you should expect corrections of up to 30% at least once per decade. But if that happens to me, my plan is not to sell. If I sell then I will solidify the losses. If you are strong enough to not sell when the market is down you can just wait for the next recovery. It may take a long time, of course. But this is all part of investing.
Now is not the Right Time to Invest
The market is at an all-time high, it might never be this high again.
I’ve been told this many times!
It always seems like it’s the wrong time to buy shares!
“The market is at an all-time high- it’s not a good time to buy shares- the market has to correct- It can’t go on like this and you might lose money”
“The market is crashing- if you buy now and the market keeps dropping you will lose money”
Both these statements are very pessimistic.
You can point to many indicators or data that can help you decide when it is right to buy shares- and you can always convince yourself that now is not the right time to buy. The problem is then, your indecision to buy shares at all. Similar to me when I was stuck between which KiwiSaver provider I should choose.
The best time to plant a tree is 20 years ago- and the second-best time is right now.Chinese proverb – I think
Just like the Chinese proverb- it’s the time in the market that counts- not timing the market.
Rather than deciding when is a good time to buy and when is a bad time to buy I use automated dollar-cost averaging and buy some every time I get paid.
No need to follow data or indicators. I invest the same amount every fortnight. I buy more shares when the price is down, and I buy fewer shares when the price is up- over time it all averages out. So now is the right time to buy shares.
You Should Invest in Houses- not Shares
Shares are too Risky-They are too volatile to investing in.
As I discussed earlier- shares are compared to gambling because they are very volatile- they move in value from day-to-day.
Now, imagine if every day you were sent a letter in the mail- ok, who uses mail- imagine an online tracker that you could access every day telling you what your house is currently worth. Would you think houses are too volatile?
House prices do change over time- just like the market- they just don’t change as fast because they are less liquid than shares. It takes time to sell a house.
Over the long term thought- shares and house prices are less volatile and have both historically tracked upwards. Let’s compare the house price index and the NZX50 over several decades- both normalised to 2000. How do they compare?
You can see that the general trend of house prices and share prices track in a very similar way- the house price index is less volatile year to year- but over a long period both the house price and the NZX50 trend upwards.
Property is perceived as being less risky than shares. And I think one reason for this is that you only know the true value of your house only two times– when you purchase and when you sell.
Shares or a share index is the same- there are only two times that you really know the true value- When you buy and when you sell. The problem is that we get bombarded with share and index price updates all the time. And our investment platforms show us their values whenever we log in- so we can watch them like hawks.
All Debt is Bad!
You need to get rid of it ASAP
The personal finance community has a beef against debt- and they are right. I’ve even posted about how you need to treat debt like it’s an emergency– but I don’t think debt in itself is bad.
Bad debt is bad!
Credit card debt, personal loans, and Afterpay services are bad debts- but I believe mortgages- which is just one large debt- is a form of good debt if used properly.
I have a mortgage, otherwise, it would be a few decades of saving before I have enough to purchase my own home- all while paying someones else debt.
I’m not saying that we should all flock out and get a mortgage- just that when I read personal finance and fire blogs I sometimes feel a sense of shame that I have a mortgage- and that somehow these people pay for house outright using cash- while I’m here with an evil loan from the bank.
It’s ok to have a mortgage!
Mortgages are super useful in purchasing a house- but when you get a mortgage you need to manage it correctly. I have saved thousands on potential interset charges by paying as much as we can afford– and shopping around for better interest rates.
So, in general, I think debt is good as long as it’s used responsibly.
You need to buy a house as soon as you can
You can’t lose money investing in houses.
There is a large bias in New Zealand towards investing in real estate. A phrase you’ve probably heard is “As safe as houses”.
I think this mentality persists for two reasons- One, investing in property and rental units is easy to understand- since we all live in a house and have likely rented a house before.
And the second reason is that there is generally some bad advice out there about the share market.
The belief that houses never go down in value is the one that gets me- just look at the US after the GFC- or look at Ireland after the building bust. Heck- just look at small-town New Zealand. The price of houses have all gone down or at best stagnated. But that shouldn’t put you off it you know that you are going to live there for a long time.
Low Loan to Value Ratios
What I see as the biggest issue with the “buy a house as soon as you can” if overleveraging. Buying a house with a low equity to debt ratio. Whenever a large market correction occurs you could find yourself owing more than what the house is now worth.
It’s not the end of the world when this happens as long as you still have your job and can keep paying the mortgage. But because banks like to keep there books looking healthy you can run into issues when refinancing your mortgage.
It’s the reverse of what has been happening in the last few years. I have heard on several podcasts that if you have enough to get a mortgage with say 10% down you should do it. Don’t worry about the extra charges and higher interest from the bank because of the low loan to value ratio.
In a few months time go back to the bank with and ask them to re-assess your house value- and since the market has been increasing- you might now have a 20% LVR on your mortgage. Refinance and the low LVR Problem solved.
Now, what happens if you have a 10% LVR and house prices drop 10%- then you have no equity in the loan- What is the bank going to do? I don’t exactly know but I do know that they need to keep certain LVR limits on their books.
Your Home is Your Biggest Investment
You can always downsize when it’s time to retire
There are two different schools of thought on this one.
Some people argue that your house isn’t an investment, but a liability because it does not create any cash flow for you, and you have to pay upkeep and taxes in the form of local rates.
What other investments are there that don’t create a cash flow for you- has upkeep costs and taxes? Well- there are many. Rental properties for one have very similar costs to your home- and even shares require you to generally pay a management fee and tax on dividends.
Others do see your house as their biggest investment. Allowing you to grow capital over many years both in terms of house price inflation and by slowly paying off your mortgage.
So I’m split on whether or not your house is an investment. Your home has similar aspects as some investments- while in other aspects it’s a money pit. A serious money pit at that! That is why I tend to sway between my home being an investment or not.
What I do know is that you should have other investments outside your home weather you think a home is an investment or not. That is because once you retire the only way you can access the capital you have built up in your home is to downsize or get a reverse mortgage.
What do you think? Is your home an investment, or a liability?
Only Invest What You Can Afford to Lose
After all- Investing is like gambling
I have mixed feelings about this one too.
First of- its quite a pessimistic view of the world. That somehow all your investments will go down to zero.
Secondly- if you obey by the basic investment principle of diversification- it is unlikely that you will lose everything.
And if you have lost everything in your diversified portfolio- then the world around you is in a much bigger problem.
Take a diversified index fund investment as an example- for you to lose everything in this investment- all the companies in that index fund need to go bust at the exact same time for the index to go to zero. Every sector and every company will need to go broke. How likely is that?
I like the phrase “only invest what you can afford to lose value in the short and mid-term”. As long as it gains value over the long term- and you are financially stable- you can afford to ride out any short term loss in the value of your investments.
I only invest money that I don’t currently need and plan to invest over a long horizon and manage my risk using diversification- all thought- I am highly exposed to shares at the moment- That way- I can afford to lose value in some assets in the short term.
Past Performance Doesn’t Guarantee Future Performance
You should ignore picking investments based on past performance
It is good to have this mindset. It helps you pick investments wisely- keeps you from being a sheep and following the herd. Chasing higher returns by looking at previous results.
It helps you avoid bubbles and crases.
There are, however, other times when you can draw on past performance to make predictions on the future. Take the rugby world cup as an example.
Using past performance you could make the assumption that New Zealand will win again- after all, they have won the last 3 out of 8 world cups- and they have been in the top 4 for every other tournament.
Their past performance is excellent.
But that doesn’t make it a reliable strategy for choosing and investment. And in fact, as we all know, they did not win the 2019 world cup
You need to look at the underlying aspects of investment- as well as the past performance. I don’t think you can just ignore past performance- which is often what I read- you need to consider it.
Imagine that you have the choice to sponsor a scholarship for a student about to enter University. You’ll pay their fees and in return, you’ll be rewarded with a percentage of that student’s future earnings over their career.
Would you rather pick the straight-A student, or with someone who just barely got into university?
Following the logic of some people who believe that the over performing in the past is an abnormally and that everything regresses to the average, you should go with the poor student because clearly, their time has come- they have performed poorly in the past- and they are due to perform averagely- whereas the whereas for the straight-A student is overdue for a pullback- back to an average performance.
You can see how this logic is flawed in some ways- the straight-A student is likely to continue getting good grades. Their grades are directly related to their character and will likely continue.
It’s sometimes the same with shares- if the underlying company is good there is no reason for there past performance not to continue.
And besides- the entire retire early community is banking on getting returns in the future that are based on historical returns.
As I said earlier- it’s good advice in that you shouldn’t only look at past performance.
I hope you enjoyed my post discussing different pieces of investment advice. The goal of this post wasn’t to tell you which is right and which is wrong- rather I was aiming to try and get you to think more broadly about each of these pieces of advice.
They all have some elements of truth in them- but if you take them as face value I think you are oversimplifying investing. If investing was that simple- we would all be well off.
Let me know what you think in the comments!