Crimes And Misdemeanors; The Seven Deadly Sins Of Investing
The Age
Sunday October 24, 1993
WHEN sentiment in any market is running ahead of fundamentals, it is well worth remembering what not to do.
Dwelling too heavily on negatives does not make a successful investor but it does not hurt to assess investment opportunities with an eye to the way in which others have come unstuck time and again.
Here, six financial planners describe the mistakes that, in their experience, have most often brought small investors to grief.
Greed IF the deal looks too good to be true, it is. ``People tend to get into trouble when they get greedy," says an adviser with Duesburys Financial Services, Mr Grant Ives.
Being too greedy takes many forms but, at its worst, it makes investors gullible. The Nigerian chain letter is an extreme example.
At least every two years, letters purporting to be from official Nigerian agencies arrive at Australian homes and offices and promise to make their occupants millions of dollars in return for the use of a bank account. Every time, a handful of people fall into this scam and lose tens or hundreds of thousands of their savings or assets.
Another type of greed is the sort that causes people to hang on too long to investments they intend to sell because they expect the market to keep rising just a little bit more.
The veteran investment advisor, Mr Austin Donnelly, says: ``Nobody ever went broke taking a profit."
Greed can also cause people to make the mistake of thinking they can get good advice for nothing. An adviser with Duesbury's Financial Services, Mr Grant Ives, says: ``People who think they are getting free advice over the fence are likely to end up with problems."
Advisor Investment Services' Mr Mark Lowe says: ``People can be too ready to believe they can get something for nothing. If someone tells you they are going to invest for you at no cost, you have to ask how they are making a living."
Naivety WHEN placing your financial affairs in someone else's hands, it pays to be suspicious.
This does not mean hiring a private detective to spy on your investment adviser or stockbroker _ but it does mean checking their credentials before you become their client and making sure they provide you with evidence of what they are doing with your money.
Mr Donnelly likes to quote a sign that hung in the quartermaster's office many years ago when he was in the air force.
It read: ``Trust in God and Get a Signature From Everybody Else."
Having seen many investors come unstuck because they have relied on the advice of others and sought insufficient information themselves, Mr Donnelly has developed a variation on this saying. It is ``Trust in God and Check On Everybody Else".
Mr Lowe also says that, at times, ``people are too trusting".
He has seen people get into trouble when they have relied on the advice of unqualified friends or relatives, swallowed sales spiels whole, and accepted verbal assurances from their advisers instead of demanding documentary evidence of investments made on their behalf.
That said, Mr Lowe accepts that it is hard to know who to trust.
Personal recommendations are the best guide but, unfortunately, whole circles of friends can go broke when they unwittingly refer each other to a crook.
The Financial Planning Association and the Brisbane-based Australian Investors Association both offer guides to choosing an investment adviser.
Imbalance A balanced portfolio is vital: putting all your investment eggs into one basket is a mistake.
According to the principal of Worley Securities, Mr David Worley, this is something that often happens to people who confine themselves to chasing high returns in one area.
``People fail to have sufficient diversity in their asset allocation _ all property trusts in 1989 or all shares in 1987."
Mr Worley said that, as well as looking at sectors of investment, people needed to diversify the types of investment they had. People who have kept all their money in debt securities like debentures and government paper are paying a price for having such a narrow investment base as these investments mature and are renewed.
Bain & Company Investor Services' Mr Peter O'Toole agrees: ``You should spread your money across all the investment sectors: cash, fixed interest, shares and property. This strategy will protect you from any one investment sector underperforming.
``If you are using fund managers to look after your investments, use more than one fund manager. This strategy should further reduce your risks."
Tax phobia INVESTORS should always consider tax deductions and social security entitlements when deciding where to put their money _ but too many people allow these factors to rule their decisions instead of merely influencing them.
The principal of Worley Securities, Mr David Worley, said: ``I have seen too many people whose bad investments were either tax-driven or social security-driven."
``I am concerned at the current practice, in some cases, of not-so- reputable people speaking at bowling clubs and pushing pension-driven investments."
Says Mr Donnelly: ``It is better to share a profit with the tax office than to keep a loss all to yourself."
Myopia DO NOT look only at the short term; and do not assume that long-term investments can be realised quickly.
A RetireInvest investment adviser, Mr Richard Orr, says that small investors are not the only people guilty of this particular sin. ``Too many people, even in the industry, have too short a time horizon."
Not so long ago, many retired investors were turning their noses up at life annuities fixed at 14 per cent because 17 per cent was available on shorter term income-producing investments.
But now that interest rates have fallen, the people who signed up for 14 per cent for life are considerably better off than those who opted for the higher short-term returns.
Worley Securities' Mr David Worley cites another problem associated with shortsightedness.
He says too many people place money they are likely to need in the short term into long-term investments. They come unstuck when they find they need cash and cannot get it out, or must pay penalties to do so, or are simply forced to get out at inopportune moments.
Tardiness GOING into a market because everyone else already has is like arriving too late at a party. If there is a good time to be had, someone else has had it already.
RetireInvest's Mr Orr says small investors are particularly vulnerable to this trap. ``They wait too long and get into the market too late.
It is like surfing. You can only ride the wave if you are already there for it."
Duesbury's Mr Grant Ives makes the same point: ``People hear about 30 and 50 per cent returns and then when they put their money in, they wonder why they are not getting the same. You rarely hear about these things until after the event. It is usually too late."
Ignorance ANYONE who tells you that successful investing is easy is lying. It is not simply a matter of hot tips, sheer good luck or having the best investment adviser in town _ investing well is hard work.
The best protection you can have is to know the markets you are investing in as well as you can. Buy and read personal investment books (these are reviewed regularly in `Money Extra'), read the daily financial press, keep up to date with electronic media finance programs and never sign anything to do with money until you know what the document means.
You must understand the risk-reward axis. Too many investors _ in almost every market _ have come to grief because they have not understood the level of risk involved in their investments, particularly geared investments.
Mr Ives says that even investors with good financial advisers can be belatedly disappointed if they do not make an effort to understand what the adviser is trying to do on their behalf. ``Investors have to be prepared to ask questions of their advisers."
© 1993 The Age