By Darren Withers
When some people think about financial advisers, they may imagine a glamorous world of fast cars, flashy suits and high-pressure trading. Surely, creating wealth for people is exciting and glamourous? Well, it may surprise you to know, that in reality, we financial advisers are a pretty dull bunch.
For the vast majority of wealthy individuals, they got to where they are today by staying out of the fast lane, avoiding speeding fines and keeping an eye out for trouble.
Financial advisers are not parachuting into Monaco. They’re at their desk, buried in excel spreadsheets, superannuation, tax management, compounding interest and risk management. And they’re certainly not pushing what’s ‘hot’ without some careful analysis first. Any investment that seems too good to be true, usually is.
In the current low interest rate environment, we have seen investors prepared to take on larger and larger risks to try and chase a return. It has meant some quite large bubbles appearing in certain markets.
- Bitcoin has ballooned by 320% in the last 12 months.
- A small Lithium miner called Lake Resources is up 2000% in the last year.
- Over the last two years Amazon has doubled in price.
- Houses in Australia’s CBDs have seen rises in the vicinity of 20% to 30% since November 2020.
When you see numbers like this, you might be tempted to jump on the band wagon, but it is potentially problematic. We have seen markets like this before. They are often followed by investor pain for those that have ignored risk and over-extended themselves. We’ve seen three examples of this happening.
The stock market crash in 1987 was brutal. In the two years prior to the October 1987 fall, the Australian share market was up 123%.
It subsequently fell 48% in just under one month.
The 2000 dotcom bubble inflicted some serious pain. In just over 5 years, the US NASDAQ index rose by over 570% until March 2000. Then it crashed, losing roughly 75% of its value by October 2002.
Between 2017 and 2019 we saw Aussie house prices fall by around 10.2% in capital cities. This was the biggest correction for approximately 40 years, and it did surprise a number of investors who had always felt that prices only moved in one direction.
So, what should investors do? Well, firstly, avoid putting everything on black. If you want to have a flutter on a speculative investment, make sure it is only a small part of your wealth, and money you can afford to lose.
Secondly, practice diversification. This is spreading investments across a range of asset classes, and assets within an asset class.
Most importantly, stay out of the fast lane. Develop a long-term strategy that will allow you to reach your goals, regardless of market conditions. This is the value of having an adviser, to help you set a strategy and stick with it. It may seem a bit dull, but it’s ultimately what works to build real and lasting wealth.
If you would like more information please call 1300 ELSTON or contact us to speak to one of our advisers.