I’ve always believed one of the best ways to become a successful investor is to understand the downside of any investment you decide to take on.
Understanding what could be ahead if things get rocky will inevitably leave you better prepared than believing as soon as you invest in something the only possible way is up!
It’s also important to understand temporary downsides and terminal downsides.
In recent years those who swallowed the “property always goes up” line have been copped a harsh lesson in some areas around the country.
While some capitals have impressed, regional areas and Tasmania are still well below their peaks, not great news if you borrowed 100% and went for interest only repayments.
Similarly, the hot tip mining share has often been known to go from dream to nightmare.
Many small miners have only ever produced ‘gunna’, a mineral that becomes plentiful when management tells shareholders what they’re ‘gunna’ do – and often it never happens!
When it comes to a more disciplined approach, data available from fund manager Vanguard allows investors to check how various portfolios would have performed before and after the GFC.
History shows January 2008 was basically the worst time to invest, considering all asset classes.
So if you’d invested $100,000 in a portfolio comprising 44% Australian and International shares, 6% Oz and International property, 22% cash and 28% Oz and International fixed interest, by January 2014 you’d have $128,680.
The return is 4.2% per annum, which is no prize, but history shows your entry point would have placed you on the cusp of the worst financial market conditions since the great depression.
At the lowest point your portfolio would have fallen to $81,045, however this also shows the importance of discipline and continuing to add to your investment throughout a downturn.
The recovery from the bottom until 2014 returned 58%, so had you continued to add to the portfolio the return would have been much higher than 4.2% per annum.
Showing a properly diversified portfolio might suffer a temporary downside, but certainly not a terminal one.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances.
