Source: Radio New Zealand
There are some pieces of investment advice that seem to always (or most often) hold true.
Compounding interest is your friend. Don’t fret about your KiwiSaver balance if you have 40 years until you need the money. Someone who is offering a really good investment won’t need to give you a hard sell.
But what about the advice that isn’t so good?
RNZ asked some investment experts what advice you’re best to ignore.
Buy what you know
Dean Anderson, founder of Kernel, says people need to be very careful about taking the adage “buy what you know” to heart.
People are sometimes told that being familiar with a company gives them an insight into whether it’s a good investment.
But he says that’s not really true for most people, and can lead to a situation where you have too much money in big name companies that you recognise, even if they’re not actually offering the best opportunity.
People who bought shares in Air New Zealand might be experiencing the negative effects of this.
“A mass amount of people bought up post-Covid in something they knew and then share prices dropped,” Anderson said. “I think a lot of people have bought companies because they know the brand, but that doesn’t make it a good investment.
“It’s a really easy narrative to put out there because it’s easy to relate to when you’re starting out. I worry that you send people down the wrong pathway and you simplify it too much.”
University of Auckland associate professor of finance Gertjan Verdickt said it could also be described as home bias.
Many New Zealanders also have too much money invested in local companies, when they would be better to diversify internationally to spread their risk.
“Investors tend to overweight domestic stocks and companies they’re familiar with, missing out on significant diversification benefits.
“Academic theory says you should hold international stocks in proportion to their global market cap weight (currently about 59 percent non-US stocks for a global portfolio), but popular advice typically recommends much less – often 25 to 30 percent , or even avoiding international stocks entirely.”
Verdickt said people should also ignore any advice to buy stocks in the companies they worked for.
“If your company goes bankrupt, you’re unemployed and your investments are worthless – you’ve concentrated your risk exactly where you shouldn’t. Yet this advice persists, often framed as ‘benefiting when the company does well’.”
Thinking of your home as your most important investment
New Zealanders tend to be focused on property as an investment but Verdickt says it’s particularly important to be wary of the investment you’re making in the home you live in.
By many measures, an owner-occupied home isn’t really a home at all because it doesn’t give you a significant income (except in the sense that you aren’t paying rent elsewhere) and if you sold it, you’d still need to pay to live elsewhere.
Verdickt said his grandmother in Belgium mentioned a home being someone’s best investment multiple times a year.
“While homeownership can be good for some people, there’s not much evidence that buying is financially superior to renting and investing the difference. Popular advice often treats housing as a can’t-miss investment, while academics note it’s often not a great financial investment and can create dangerous concentration of wealth in a single illiquid asset.”
Save 10 percent to 15 percent of your income at every age
People are often advised to set up a savings habit and stick with it.
Verdickt said economists would argue that you should smooth consumption over time, not your saving rate.
“That typically means low or even negative savings when young when income is low, high savings in midlife, and spending down in retirement. The constant savings rate advice ignores life-cycle income patterns and the time value of money in a way that’s economically suboptimal.”
Keep emergency savings even when you’re carrying credit card debt
You have probably also heard the advice that it’s important to have an emergency savings account to fall back on, in case of things like unexpected expensive repairs being required on your car, or another unforeseen financial emergency.
The idea is that this stops you needing to take on expensive debt if you hit a financial squeeze.
But Verdickt says it’s important to think about this in a wider context. It may not make sense to build up your emergency savings account until you’ve cleared your expensive debt.
Verdickt said it was common for people to have money in a low-interest savings account at the same time as carrying high-interest credit card debt, which did not make sense.
“It’s economically irrational given the interest rate spread. You’d be better off paying down the high-interest debt and using available credit if needed.”
Timing the market
You might hear people telling you now is a good time to get into a particular investment, or that you should stay on the sidelines until a certain condition is met.
Ana-Marie Lockyer, chief executive of Pie Funds, says you should probably ignore that and not jump in or out based on headlines or short-term movements.
“It’s very difficult to get right consistently, and often people end up missing the best days of the market, which can have a big impact on long-term returns. As an example, would you believe that we woke up to the S&P 500 being at an all-time high amid so much geopolitical uncertainty, that’s nearly 10 percent up on the end of March.
“Too often we see investors move to conservative investments as soon as markets become volatile. While that can feel safer, switching after markets have already fallen can lock in losses and mean you miss the recovery. In that example, those investors with exposure to the S&P 500 who made decisions during the volatile period since the beginning of March may have missed some or all of this bounce.”
Don’t look for quick wins
Lockyer said people should also be careful about anyone offering short term gains or quick wins.
“Investing tends to work best when it’s boring and consistent – diversified, long-term, and aligned with your goals.
“The key is to take a step back from the noise, focus on a strategy that suits your timeframe, and stick with it rather than reacting to every market update. As Warren Buffet says… the market is a way of transferring wealth from the impatient to the patient.”
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand