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News Bulletin : ADA News Bulletin July 2011
34 July 2011 Compiled by Stuart Wemyss business perspectives the story of gOLDiLOCKS AnD tHe tHRee BeARS A credit advisory client, ‘Keith’ [not his real name] called last week. Keith was excited and needed some urgent assistance because he had just signed a contract to purchase his first investment property for $670,000 and settlement was less than four weeks away. He admitted that it “all happened really quickly” and hadn’t considered how he’d finance the property, the ownership structure and so forth. That’s a lot of money to invest off the back of zero planning. Confusingly, other clients in positions 100 times better than Keith’s never seem to have the courage to make a start. So it got me thinking. Why is it that many people seem to operate at either end of the risk scale? They are either in some sort of investing coma (i.e., wasting opportunities by doing nothing for many years) or foolishly gung ho – both make me scratch my head in utter confusion. Inves&ng Coma Foolishly Gung Ho Too Risky No Risk Reasonable investment strategy Our approach IS LOvE YOUR dRUG? What do you call it when seemingly intelligent, risk-adverse, hard-working people make insanely foolish and speculative investment decisions without realising it? I’d like to invent a word because I see it all the time, e.g., a first-time investor buying three investment properties in as many months, choosing to invest in USA property instead of blue-chip Australian property as the foundation of a strategy, holding all wealth in (physical) gold bullion and (sadly) the list goes on (some of these are extreme examples but you get my point). I liken it to trying to travel to Europe in a hot air balloon...theoretically you could probably make it but your chances of success are wafer thin so you’d better hold off on booking accommodation for your arrival! So, why isn’t the level of risk they’re taking more obvious to these schizophrenic investors (schizophrenic because they say they are risk-adverse investors but act otherwise)? Not only do they believe they’ll get to Europe but they think it will be an uneventful trip. I guess the answer could be different for everyone but I’d like to propose that these investors are overcome with love...in fact, love has taken over and it’s drowning out any logical thoughts that might be trying to get some airtime. They are in love with the potential outcome. In love with the outcome of making lots of money quickly and feeling successful – the fast track – money in the bank, a nice holiday, the feeling of security and so on. Their love struck demeanour doesn’t allow them to acknowledge that the probability of achieving the desired outcome is tiny. Frankly, there’s a higher probability of Arnold Schwarzenegger winning ‘husband of the year’! You should never leave these investors alone in a room with their money. High on love, they’ll blow the lot! These sorts of people are in desperate need of a ‘councillor’ (aka financial planner) but like most people with addictions, they don’t realise they urgently need help. COME On JUST dO SOMETHInG! I have always regarded the definition of success as ‘taking full advantage of your skills and opportunity’. Recently, I heard another definition which I found interesting. It was suggested that success is simply ‘being satisfied (at peace) with your achievements’. How do you fare according to these definitions (in respect to your investing success)? There are plenty of people reading this article that probably aren’t making the most of their opportunities. I see people with lots of equity in their property(s) with large incomes doing nothing. “The market is weak and I think prices will fall”; “the market is too hot”; “I just want to see how high interest rates go”; “I just want to repay a little extra off the home loan’; “it’s on my list”...and the procrastination goes on. One day these people will wake up, the kids have finally left home and they now realise that there’s only ten years left until retirement (hopefully). In fact, wasting time could be the largest and most costly risk there is when it comes to wealth accumulation. Whilst we are all good at making excuses, most people don’t realise they are wasting so much time. Put it this way, can you believe its June already? We say it every year but time really does seem to move faster. The days, weeks, months and years fly by at an increasing pace. Together with a bit of excuse making, it can sneakily result in complete under utilisation of your opportunities. Also, intelligence isn’t a necessity advantage when it comes to investing. Smart people tend to make things more complicated. They take a simple, yet fundamentally sound (and proven) investment strategy and add their own ‘fine tuning’...consequently ruining the strategy. Smart people tend to have more options so
ADA News Bulletin June 2011
ADA News Bulletin August 2011