Spread the Risk because it’s not Safe in Houses

This week’s Australian Bureau of Statistics housing data highlights, yet again, the risk of betting all your money on anything.

Image result for funny dog house pictures

The decline of 1.7 per cent in Perth house prices in December quarter might seem like a temporary blip, but it masks the real tragedy unfolding.  Perth house prices have declined nearly 7 percent since 2014.  In the past 10 years, they show a compound rate of return of a pathetic 0.8 per cent per annum.

We’ve highlighted before how this has all but destroyed the retirement dreams of many baby boomers who were relying on property.

But what has happened with property has happened before and with other assets.

A share, an invention, a block of land in the bush, a sure thing down at Ascot or Randwick.  We’ve all experienced or know of someone who’s been caught.  Irrespective of the asset, it underpins the importance of spreading the risk, diversifying our investments and whether it’s $100 or $100,000 the principles are the same.  Only the number of zeros change.

Investment portfolios ideally are made up of quality assets.  This is the stuff we understand, can see how and why they make money and don’t need to be “sold” the merits.

We  just need to have the principles explained.  You don’t need to know in detail how a Wesfarmers or a BHP works, just see what they do and look at their track record.

Contrast that with the lithium explorer who three years ago was a biotech firm.  Sure, one day they might hit the lithium mother lode, but in many respects it is no different to putting $10 on number four in the last at Ascot or Randwick.

Good for a bit of fun maybe.  It might come good but not worthy of betting the house on the outcome.

Even here we look to diversity.  There’s ample evidence to show that we need at least eight stocks spread across eight sectors of the economy.  Having a $100,000 share portfolio made up of Westpac, Commonwealth Bank, National Australia Bank and ANZ is not diversifying; it is exposing you to a downturn in the banking sector.

Professional portfolio managers will have resources, media, retain, manufacturing, utilities, health, technology, agriculture and energy featured in their portfolios.

From there, we need to match the timeline of the funds to our needs.  Money for the trip to Europe later in the year – parked in cash, no question.

Money to fund your 2025 trip?  No issue in having that invested into quality growth assets.

Sure the road might be bumpy but that’s the price paid for returns that are better than a bank account.

It also requires discipline to take the profits when they’re there and to hold back when the inevitable bumps come along.

It takes the mental strength of Solomon  to stare at a front page headline screaming that stocks have slumped by $60 billion in one day.

Make no mistake, these times will come but the wise, the savvy, the true investors know enough about where their money’s invested.

They understand that a 20 per cent decline in a share price doesn’t mean Wesfarmers has closed it Bunnings outlets, or that BHP’s iron ore reserves have evaporated overnight.

Source:  Nick Bruining “Your Money”  26 March 2017

 

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