Chrissie’s Corner November 2020
What not to do in times of uncertainty.
And I’m back….
My writer’s block has finally cleared and I’m ready to start pleasuring you all again with Chrissie’s corner. I know you are all cheering and can’t wait to get stuck into it.
If you know me, you know that I am a self-managed super fund adviser at MBA. I’ve been working in the SMSF space for around 10 years now and over that time have seen a lot of funds and a lot of different investment strategies.
I’ve seen investments in the common products such as cash, property, managed funds and shares, to the less common, classic cars, jewellery, shipping containers and whisky barrels. You might think this is exciting and sophisticated, except in most instances it’s not. Over the last 10 years, I have seen a lot of SMSFs lose significant amounts of money because of their choice in investments. Ultimately, I have come to realise that there are some people suited to having a self-managed super fund and others that may not be. Managing your own investments can be fun and exciting, it can also be time-consuming and difficult and often the outcome you are wishing for isn’t the outcome you get.
I will be honest, I have absolutely no idea how to build a house, I doubt anyone truly knows how to do this unless they are a builder. I also have no idea about building a car, I bet though that the people who work for car manufacturers have a good idea. I’m also not the greatest cook, I don’t really enjoy it and only do it because my kids would get angry if I didn’t feed them. My meals are pretty sub-standard, edible but definitely nothing fantastic. I bet though that a Chef would generally cook meals much nicer than mine, and when I go to a restaurant I expect really great food which they should be able to deliver because they’ve had formal training and spent many hours of practice perfecting what they do.
You might wonder where I’m going with this. The point of my story so far is this. Most of us accept that we aren’t builders, we aren’t car manufacturers, we aren’t chefs. We accept this and when we need those services, we pay the experts to do them for us. Yes, admittedly we can try to do them ourselves. But that takes time, effort, training, practice and at the end of the day, there is no guarantee that your house, car or meal is going to be very good if you try to build/cook it yourself.
So relating this back to the purpose of this article, I constantly wonder why people build their own super and investment portfolios themselves if they may not know really what they are doing? Why do they potentially risk all or a big chunk of their retirement or their savings trying to DIY it rather than pay an expert to help? I’m not going to answer that question today because honestly there are a dozen different reasons. What I do want to run through today, is some of the common mistakes I’ve seen people make in their investment/super portfolios and their financial lives in times of uncertainty.
- Fail to plan, plan to fail
If you don’t know what you want to achieve and you don’t have a plan to achieve it then there is a 99% chance you will fail. A builder doesn’t decide to just start banging a few bits of wood together and hope that it’ll turn out looking like a house. They have carefully designed house plans that need to be followed to ensure that they achieve the result they are after.
This is the same for anything in your life financial related. It could be something as simple as saving for a car or a house deposit, to knowing you want to retire at 60 and live on 120,000 after tax for the rest of your life as well as leave an inheritance of $100,000 to each of your three kids.
It’s actually a pretty easy process and you can start any time in your life.
Some things to consider;
- Some form of a budget is 100% necessary. By documenting your spending patterns and knowing your regular expenses, you will be able to ensure a healthy balance of income, expenditure and savings. Once you know where all your money goes you’ll be able to direct your cash flow more effectively.
- There is no quick fix. It’s highly unlikely that you will win the lotto and next time you get offered that investment opportunity that looks too good to be true, just think that it probably is. Get rich quick schemes are generally just that, a scheme.
- Nothing in life stays the same which means that we need to regularly review not only our plans but our entire financial situation. Not reviewing your situation regularly will mean that you are not adapting your situation to necessary changes.
- Not having a contingency plan
No one knows what’s around the corner. We often don’t know what appliance might break down all of a sudden, what emergency may pop up that requires time and money, what family member may become ill or die. Covid was a huge example of not knowing what may happen. People who thought their employment was secure lost their jobs. People getting paid in excess of $100,000 a year were all of a sudden forced to live on $1,500 a fortnight from the government. Most people never think something like this will happen to them so they don’t plan for it and they don’t have a contingency plan in place to support them through these times.
Some things to consider;
- Only one in five Australians have a stash of savings and these savings would barely cover them for more than a month in an emergency. Everyone should have an emergency fund, and this shouldn’t only be a grand or two. Think serious emergency, where you need to cover three to six months worth of ongoing expenses. So if you have no savings, I highly recommend you create a budget and work out a way to start some serious saving.
- Insuring yourself is just as, if not more important than insuring your car or house. What happens if you or a member of your family falls ill and you cannot work? How do you continue to pay all the bills, let alone any additional medical costs? Yes, you may have insurance within your super fund, but do you know how much you are covered for and in what situations it may payout. How about your wife who has been at home for the last 5 years looking after the kids. She probably has barely any super, let alone insurance. What happens if she falls ill or dies. Who looks after the kids and runs the household? What if your husband who is the higher earner is in a car accident and becomes permanently disabled. How do you look after the kids, make money and look after your disabled husband? Insurance may seem useless if you never get to claim, but why take the risk.
- Insurance and estate planning go hand in hand. No one enjoys the process or paying the costs, but they are necessary. Often we hear that a Will isn’t prepared because they have nothing to pass on. But they’ve completely forgotten about the $500,000 insurance policy in their super fund. There are many parents who have never considered the guardianship of their children. Mum thinks that her parents will look after the kids if something happens, but Dad thinks it will be his. And if you think you have an estate plan in place, pull it out and review it. If it’s more than 10 years old then surely things may have changed a bit and it needs reviewing?
- Listening to friends and family
Some of the worst financial decisions we make are because we take recommendations from friends and family. Most people love to dish out advice, whether it’s useful or not. When it comes to your family and friends, it’s too tempting to resist taking advice from people who swear it has paid off for them. In some instances it probably has, but that could have been for a number of reasons, generally luck being a large part of the outcome.
Some things to consider;
- Everyone’s financial situation is different. What works for one person may not work for another. Everyone has different risk appetites and risk capacity. Investing in bitcoin, for example, is considered high risk, some may even consider it gambling. Let’s say brothers, Bill and Bob both invest $1,000 in bitcoin at the height of the market. Then the market crashes and their $1,000 is worth $10.
Bob has a nice big cash buffer so he isn’t worried about the $1,000. His brother Bill though is living week to week and that $1,000 loss now means he can’t pay the rent this week.
- Friends and family are often unqualified to give advice. Advice is tailored to your personal situation and takes into account your goals, age and timeframe, tax, risk profile, family etc. Generally, any advice given by a friend or family member is investment-related and based on only one parameter – returns.
- Crystallising losses
Market downturns can be stressful, especially for retirees who have a lot of their retirement funds tied up in the stock markets. In times of share market downturns, a common natural instinct is fear. Fear that we are going to lose everything, fear that the economy will never return to where it was before. Fear that we are going to live on bread and water for the rest of our lives.
So often this fear leads to big investment mistakes, the main one being that we sell down at the reduced value and crystalise our losses, or lock in the losses.
Some things to consider;
- When we invest, the value of our investment goes up and down constantly. That movement is effectively only a movement on paper until we realise a gain or loss. Many people with a good strategy and portfolio hold onto their investments for a long period of time and collect the income that they generate. Other’s regularly buy and sell, trying to buy low and sell high to realise a profit. If you buy high and sell low, you have realised or crystallised your loss. When investing for the long term, maintain a healthy buffer of cash so that you aren’t forced to sell when the market is down.
- Fear is an emotion and we should try not to make investment decisions based on emotions. A good financial plan will mean that you won’t need to make decisions on emotion. So next time you are worried about how you are invested or worried that you don’t have that cash buffer to protect you when the market goes down, or even if you are one of those who have sold when the market has dropped and locked in your losses. Think about whether or not this is something you want to handle on your own or if you should talk to an adviser to help.
We are here to help if you or anyone you know needs it.