The three biggest investment mistakes

KF: We have Graham Hand, now Graham’s managing editor at First Links newsletter. And we are asking him about the three biggest investment mistakes.

G: Yeah. Okay. Well, thanks for contacting me. What fascinating times we are in. You know, people should think about their investment lessons in a 20- or 30-year horizon. And so not wanting to focus on the short term. But clearly, we’re in a crisis at the moment with Corona virus. The market’s down 30 per cent in less than three weeks. So, it’s an interesting test for the investment philosophies and lessons that people think that they’ve learned.

J: Graham I remember when 87 occurred, I called my broker, said, sell everything. What an idiot I was.

G: Yeah. And that’s the issue, John, that – one of the big mistakes people make, is they don’t match their portfolio with the risk appetite. And so, when the market is rising and everything looks good. People say, oh, yeah, you know I’ll invest in equities. And sure, there might be a bit of a setback. But people need to understand that these sorts of corrections are actually more common than you would think. You’re right, about 87.

And then we had the GFC. We had the tech crash, in fact we get a correction, a big correction, bigger than this at least once every 20 years. And it’s only 12 years since the GFC. So, my first sort of mistake that people commonly make is they don’t match the portfolio with the risk appetite. So, if people now are saying, oh, you know, I only had a million dollars to retire on and it’s now worth seven hundred thousand dollars, and they start to panic at that level.

One of the reasons for that is their portfolio wasn’t sufficiently diversified. And if they’d had some in cash and bonds and other assets, then the portfolio might be down only 10 or 15 per cent and they might feel a bit better.

KF: So, what’s the second biggest mistake, Graham?

G: The second one is that I think people don’t match their portfolio with their goals. It’s a very starting point of investing is not what shall I invest in? As in should I buy BHP or Rio or Commonwealth Bank? It’s why am I investing? And I think about say, well, in the case of my 34-year-old daughter, she wants to buy a house, she and her husband are madly saving. You know, she hopes to buy a house in the next couple of years.

And I said to her a year ago, really, all you can do with your money is leave it in cash, because imagine here’s a $1 million deposit that she’s spent 15 years accumulating was suddenly worth seven hundred thousand. It totally compromises the property you can buy. So, if your investment horizon is like that only a couple of years, then you have to be conservative. Otherwise you get hit by events like this. But if you’re 50 years old and you’re saving for the next 30 or 40 years, then you can afford to take a bit more risk.

And corrections like this, hopefully over time, will just appear as an unfortunate blip on a steadily rising market.

KF: Okay, so the third, the third and final mistake?

G: The third one, I think, is that people also not only should focus on returns, but costs as well. And the great development in the market, which was you know, it’s very easy now to invest very cheaply. You know, you can buy an exchange traded fund which represents an exposure to the entire market for only seven basis points. That’s point .07 percent plus a little bit of brokerage. So that’s almost free. Investing now in the last few years has become almost free.

So, if there is a fund manager who is charging, you say, 1 percent to manage your money. You have to be really comfortable that that fund manager is going to justify that cost. And let me just give you one number. If you’d invested $100,000 20 years ago, ignoring the last few weeks, that $100,000 would have grown at about 8 percent per annum and would now be worth about $500,000. But if you just had costs of just 1 percent because of the compounding effect of that 1 percent, the final sum would be more like $400,000.

So, although 1 percent doesn’t sound very much. If you started with $100,000, you’d now have a $100000 less. So, the third lesson is the one thing you can control is your costs. So, keep your eye on that.

KF: And that’s like banking as well, isn’t it? If you don’t ask for it, you’re unlikely to get it. So test your fund manager.

G: Yeah. And look, the fund manager may offer different ways to access funds. But you’re absolutely right. If you’re borrowing at the moment from a bank at four or four and a half percent. You know, you’re a phone call away from 2.8 percent. So why wouldn’t you do that?

J: Graham, wise and sage advice certainly in these exciting and interesting times of which we live. Take care. We’re going to make sure that on the Your Life Choices Web site link is to for the free newsletter. And we thank you for giving up your time today on Mind Your Own Retirement.

G: Thanks, Kaye. Thanks, John. And let’s hope the market recovers and everyone’s health is good from here.

J: Go wash your hands, Graham.