Top investment tips for 2008

The belly-ups of the past year should tell investors they can't trust so-called professional advice, Jenni McManus is advised.

If you can't be bothered or lack the financial skills to research, understand and manage your investments, put your money in the bank.

That's the word from Kapiti broker Chris Lee and Bruce Sheppard, chairman of the NZ Shareholders' Association, who say disastrous finance company investments and multi-million-dollar losses in 2006-07 should be telling investors they cannot afford to trust the so-called professional judgment, ethics and risk-assessment abilities of most financial advisers.

 Nor can investors hand over to others the responsibility for their own financial decisions.

If you want to run an active portfolio, be prepared to read and understand annual reports, company announcements, prospectuses and investment statements, they say.

Watch your investment, and know when the market price is running away (in either direction) and what to do about it.

Design a sensible investment plan. If you're not prepared to do the groundwork and learn, "there is nothing wrong with money in the bank," Sheppard says.

"Otherwise what you don't know will kill you." The key issues for 2008 will be risk, control and liquidity of investments, meaning your funds should be somewhere you can get access to them whenever you need to.

The best strategy for those hit hard by this year's finance company debacle, where thousands of investors have lost millions of dollars in the unlisted debenture market, is to lose and move on, says Sheppard.

"It's obviously better to win and move on but the most important thing is moving on," he says. "Don't sit around for the next 12 months trying to work out how to make someone pay for your stupidity.

Learn the lessons of the past. Losing 100k in a finance company wasn't smart but learn the lesson. And if you want to invest in legal fees [by suing financial advisers and company directors] remember litigation expands to fit the money available.

Treat all litigation as an investment. Work out the payback, the rules and how to do it."

The end of the year is a time for reflection, he says, for investors to realise what they've done in the past has not worked (with the exception of property over the long-term) and that different strategies are needed.

Bridgecorp, Five Star, Nathan Finance, Capital + Merchant and their mates are a salutary lesson that risk matters, that diversification doesn't mean spreading one's life savings across several dodgy finance companies, that the man from the finance company doesn't necessarily know more than you but is being paid a big fat commission for selling those debentures and that, ultimately, when the proverbial hits the fan, he will take his phone off the hook and you will be on your own.

Likewise, Lee says that nowadays it "has to be a pretty good story to get me out of cash".

"I wouldn't go anywhere near property [investment]," he says. "There's a good chance prices will continue to fall.

The banks are falling over themselves to bring money back rather than chasing lending growth. They are genuinely short of liquidity, both here and internationally."

Lee says the only strategy should be to invest in quality and in entities that can be quickly liquidated, and focus less on rising profits. Information-based decision-making, not interest rates, should be the priority.

"When in doubt, there is nothing wrong with a bank term deposit. Money won't rot earning 8% to 9% interest in banks."

Sheppard says it's critical investors learn to "own" their decisions, meaning a lot of hard work if they want to invest, manage and control their money.

He says he wouldn't touch managed funds as they are "far from active investing" and "I hate the snake oil that financial planners dig up".

Pay someone who is smart or be smart yourself, he says the big issue being how "ordinary" investors can figure out who's smart, who's not and who's actually trying to rip them off.

"If you do boring stuff and put your money in the bank, you will probably do better, and have more peace of mind and control, than paying somebody else to [make the investment decisions] for you.

"Over the past year you'd be lucky to find one in 50 people who have done better than bank deposits, once fees are taken out.

Most people are better to put their money in the bank, especially with the dependency culture of New Zealand over the past 40 years. Around 70% of the population is now dependent on others to pay their grocery bills. You have to ask yourself whether dependency is the best way to live your life."

Buying rental property right now is a mugs' game, Sheppard says. "Rents are not driven by interest rates but by occupancy. It's supply and demand in the purest sense.

We are, if anything, oversupplied. Positive migration is the only thing that drives rents up and pushes up yields at the bottom end. This has all dried up.

"Unless there is a mass return of New Zealanders wanting to come home, rents ain't going to rise, apart from a few strategic areas where it all comes down to location, location and location."

So Sheppard says what he calls the "bungalows in the 'burbs" won't be doing anything positive in a hurry.

With apartments, the "classic investment", body corporate levies consume most of the returns. "It's interesting only if you can buy the whole building and manage the body corporate," he says.

Even so, rental yields are only 2-3 per cent and are not expected to rise anytime soon. "It's been a rough year and the property market is difficult."

Some protections are on the horizon for future investors. New disclosure obligations for investment advisers come into force on February 29, meaning information about fees, commissions and other remuneration must be given to clients, including "soft" commissions and indirect benefits to advisers.

Their experience and qualifications must be disclosed, along with criminal convictions. Advertising by investment advisers will also be regulated. Fines of up to $300,000 can be imposed and the courts can impose up to $1 million in civil penalties.

INVESTING IN 2008

Ensure your investment can be liquidated quickly if necessary.

Do your homework and risk analysis, no matter how "safe" and "fantastic" others say an investment might be.

Do not blindly accept advice from so-called "professionals". Their agenda may be different from yours and they may not have your best interests at heart.

If in doubt, put your money on fixed deposit at the bank. It won't rot earning 8%-9%.

Accept your losses and move on.

Forget rental property.

Diversification doesn't mean putting your life savings into five finance companies.

If you choose equity investments, the average investor running an active and aggressive portfolio can manage only five to 10 investments at any one time.

On risk and asset allocation, Sheppard says it's simple: when you're 20 you can take extreme risks; when you're 60 you can't. At 20, 100 per cent of your investments should be in owner-operated businesses (including residential property); at 40 you should be debt-free with 80 per cent of assets in businesses; at 60 you should have 70% of your assets in cash, 30 per cent in businesses and no debt.

 

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