Hannah McQueen is a financial adviser, personal finance author, chartered accountant, and the founder of enable.me now part of AdviceFirst.
OPINION: One of the golden rules of investing is the egg analogy that is, dont put them all in one basket, otherwise if the basket falls, all the eggs crack.
But its a rule more investors seem to overlook as they flock to DIY investment apps.
Hatch, Sharesies, InvestNow and others have all undoubtedly been positive developments for investors and New Zealands capital markets. Theyve democratised investing, made it accessible and fun, introduced shares to young investors and even reintroduced them to investors who had shunned them since the 1987 stock market crash.
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As a result, most clients when they first come to see us now have some kind of share portfolio, when just three short years ago that was a rarity unless they had a significant asset base.
But I have noticed one particular fishhook that keeps cropping up more often than not their holdings are a random selection of shares. When you enquire as to why theyve chosen those particular shares, theres little method involved.
Sometimes its simply based on name recognition Allbirds, Rocketlab, My Food Bag. Other times its because their uncles cousin said it was likely to be a winner, or their best friend had already made money out of it, so they wanted to get in on the action.
FMA research substantiates that anecdotal evidence 31% of online DIY investors admitted they were driven by a fear of missing out, and 27% invested on the strength of a recommendation, without doing their own research.
LAWRENCE SMITH/Stuff
Simran Kaur and best friend Sonya Gupthan host a financial podcast aimed at helping younger people invest in the stock market and break down some of the age-old stereotypes.
If youre investing randomly with a bit of play money, who cares speculate all you like. But if youre investing seriously for your familys future, and have a specific outcome you need to achieve, Id argue thats not the method thats most likely to achieve your aim.
Take for example the S&P/NZX 50 Index, if you had invested in the whole index between January 2012 and December 2021, your annualised return would be about 16%.
The S&P/NZX 50 Index had a higher return than 68% of the individual companies in the index. So, while youd hope youd pick a selection of those over-performing stocks, the odds are that you could pick more which underperformed the index.
Further, only 2% of the shares on the NZX had lower volatility than the index, and thats relevant too when investing ideally you want the highest return with the lowest volatility. Picking a fund that spreads its exposure across different industries helps you withstand specific events that impact a particular sector.
For example, if your picks a few years ago favoured Air New Zealand, Auckland Airport and Tourism Holdings, your exposure to travel and tourism would have resulted in outsized volatility in your portfolio, which can be hard to stomach.
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Hannah McQueen is a financial adviser, chartered accountant, personal finance author and the founder of enable.me.
But staying local has its risks, too. In 2021 if your exposure had been entirely to New Zealand shares youd have done particularly poorly according to the MSCI country index, the NZX was the worst performing developed market.
What Im getting at is ideally your investments are diversified across industry, asset type and geography.
Without a large budget and an enormous investment of time, its difficult to achieve and maintain that balance by buying individual shares, which is where investing in managed funds or index funds can be a great alternative provided you invest in fund that doesnt charge you a kidney in fees.
(Please note Im not wading into the debate around passive versus managed funds, which continues to be hotly debated Im talking about the difference between individual stock picking, and diversified investment funds).
This is not an attack on investment platforms, where you can opt to index in funds. Nor am I saying you cant invest in stocks that take your fancy.
If youre only investing a bit of play money, then any upside will be a bonus rather than something youre relying on. If youre comfortably on track to hit your financial goals a few dud investments wont impact your trajectory but the fact is most people are not on track and cant afford to be cavalier with their investment approach.
Therefore, Id suggest your investment strategy shouldnt be driven by FOMO, name recognition or whispered BBQ stock tips. It should be driven first and foremost by what youre trying to achieve.
Picking the investment option before youve determined the outcome you require is like devising the route before youve settled on the destination you could end up anywhere.
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