Author: Dr Shane Oliver, Head of Investment Strategy and Chief Economist, published on 7 August 2018.
In this edition, Shane Oliver shares nine key things to bear in mind for a successful investing.
Key points are as follows:
- Investing during times of uncertainty can be nerve-wracking, but even in good times, it can be problematic. For this reason, it’s useful for investors to keep a key set of things – call them rules – in mind.
- The key rules I think are to: make the most of the power of compound interest; be aware that there is always a cycle; invest for the long term; diversify; turn down the noise; buy low and sell high; beware of the crowd at extremes; focus on investments offering a sustainable cash flow; and seek advice.
In the rough and tumble of investment markets its very easy to get distracted: by talk of the next best thing that will make you rich, by the ever-present predictions of an imminent crash, by the worry list that constantly surrounds investment markets relating to growth, profits, interest rates, politics, etc.
The investment world is far from neat and predictable. The well-known advocate of value investing, Benjamin Graham, coined the term “Mr Market” in 1949 as a metaphor to explain the share market, but it also applies to most other investment markets. Sometimes Mr Market sets sensible share prices based on economic and business developments. At other times he is emotionally unstable, swinging from euphoria to pessimism. Mr Market is highly seductive – sucking investors in during the good times with dreams of riches and spitting them out during the bad times when all hope seems lost.
This is particularly the case at present where noise around President Trump – often set off by a late night tweet – can set off market volatility and where this can be magnified by digital media in which it seems everyone is vying for attention leaving the impression we are in a constant state of crisis and volatility.
To help investors avoid being seduced by Mr Market there are nine key things to bear in mind. I haven’t written on this for a while but here is my list of the nine keys to successful investing.
- Make the most of the power of compound interest. One dollar invested in Australian cash in 1900 would today be worth $236, but if it had been invested in bonds it would be worth $877 and if it was allocated to Australian shares it would be worth $559,281. Although the average annual return on Australian shares (11.8% pa) is just double that on Australian bonds (5.9% pa) over the last 118 years, the magic of compounding higher returns over long periods leads to a substantially higher balance over long periods. Of course the price for the higher returns from shares is higher volatility – evident in rough patches like the Great Depression, 1973-74 after Elvis appeared via satellite from Hawaii to when The Brady Bunch was canned, 1987 and the GFC – but the impact of compounding at a higher long-term return is huge over long periods of time. The same applies to other growth-related assets such as property. So one of the best ways to build wealth is to take advantage of the power of compound interest and this means making sure you have the right asset mix in your investment strategy. (Speaking of The Brady Bunch – their house in Studio City LA was recently “sold” for over $US2m by the one family who bought it in 1973 for $US61,000. NSYNC bass singer Lance Bass offered “WAY over” the asking price of $US1.9m and was accepted but then got gazumped by a Corporate Buyer (likely a studio) who wanted the house at any price. Assuming the sale price is $US2.1m which is conservative and there was a net rental yield of 3.5% along the way this implies a compound annual return of 11.7%pa!)