Mitigating Major Risk Strategies?

I agree totally with your sentiments towards the share market but in any discussion about asset allocation the above phrase is very important.

Willy

 

If you’re referring to the property we owned that was not by choice but due to a unique circumstance with my wife’s employment that prevented us from owning shares for a period of time.

We might have been able to draw on leverage from property during the GFC but had we been able to invest in shares during that period mentioned above we would have been significantly wealthier without the property.

I hate property with a vengence which likely contributed to me not being that particularly good at investing in it. Some good decisions, some very ordinary ones. Property, it’s associated baggage and it’s debt stressed me out. End result was more that of forced savings rather than any great capital growth. A **** load of debt can make one very focused on saving hard to reduce it. Hence we needed the leverage from property during the GFC to make up for the very ordinary property performance during that period when we couldn’t own shares.

So my personal belief in regard to property is that regardless of what stage of life one is at other than owning our own home (if circumstances make sense eg job doesn’t require you to move regularly) then there are generally better investment alternatives for diversification.

 

I had got out of shares years before the GFC as my companies had matured and were paying out too much in diividends and not reinvesting for the future and suckered in the dividend investors to over pay while the CEO's bailed out , one had been taken over and bought out. I then bought property and waited for asset price correction. Same time as GFC my farmland boom started. used LOC to build one property and buy another for 200k each which rented for $270/week. Then the bank wouldn't lend any more money to buy cash flow positive property because of the post code they where in ! They would only lend for certain locations even though the yield was crap ( losing 15k p/a) Go figure ! So I bought a crap property in Brighton though it has performed well this year. The GFC was a non event but provided great opportunity with cheap money and cheap shares. I borrowed money @ 1.75 % from Royal Bank of Scotland for a derfered purchase plan with put options ( insurance against share price fall) with a fully tax deductable, 3 year interest in advance 100%LVR loan non recourse loan to buy exposure to USA real estate via exposure via the Dow Jones Property Index and BRK shares. Also bought STW shares directly buying in at 3 month lows until 2013 when I was able to identify sound individual companies with promise.

 

I'm pretty sure this was Nodrog's car I saw yesterday .



Seriously though - at first I liked property because of the ability to create extra value yourself by doing reno's etc. And the perceived stability of it as an asset class. But I'm coming to realise that the purpose of money for me is buying time and freedom to do what I want, so I have to factor in spending weekends sanding decks as a cost as well. Not to mention the fear of having so much debt tied up in a single asset (a house) that has many factors beyond your control which can impact its value (eg. Rezoning, termites, bad neighbours moving in)

Charts like the one Nodrog provided on dividend growth, plus the franking advantages of aussie stocks, makes a well diversified share portfolio seems much safer to me during the accumulation phase at least than property. I recommend the Paul Merriman Sound Investing podcast series as he does a great job of putting equities growth, risk and variability in perspective.

 

I think the stats pretty much show that property and shares return about the same in the long run. I personally love property and have been pretty successful at the flipping thing the past 30 years but I have also realised that direct property takes up too much damn time. I do have time up my sleeve but I would rather spend it doing other things than dealing with tenants. I have decided that I will own property but only through REITs. You get A class assets and have a few hours a year worth of work per year reading a report as you let others way more experienced manage it. Sit back and collect 5%-7% divvies which is about what you would get, at best, doing it yourself anyway. Don't like that portfolio anymore? Bang, sell out,get your money in 2 days and find something else you like. A bit of brokerage as your cost only.
For me a well diversified share portfolio is the way to go. Sequence of Return Risk is something that I believe in and is an issue in my circumstances, so I am DCA'ing into the market over 3 years. If we had just gone through a major correction I would have just lump summed it. But it is what it is and that's what I am comfortable with.

 

@dunno @Nodrog do you set stop losses in your active/passive investing?

 

I am at the stage that I don't need finance, yes, if you are a PAYE or have a business it is difficult. I have assets outside shares/super/property that I am selling to finance purchases. I enjoy property, renos and development, to manufacture value. It is an asset class that I know well and have been able to leverage- it certainly isn't a passive investment. I bought 2 IPs well under land value in the GFC, still hold, did well with those, excellent CG and yield- so it was a good decision to sell and get out early. I am overexposed in residential/commercial property, but comfortable with that at the moment.

 

ABSOLUTELY NOT!

I’m an investor, not a trader.

 

100% shares, no exiting market, worried, still stayed with it using margin loan and cash but watched gearing very, very carefully. No stop losses and no trading.

Participated in every capital raising I could funds permitting.

1987, 1990's, 2000 tech wreck and general falling in of sky. Nervous as heck as I will be when the next time the brown matter hits the aircon.

And bet most will be as well. No matter what you say you're going to do when a lighted flame is held to your nether regions you're gonna need big ones.

 

Yep, that pretty much summarises us too. Did not have a huge exposure in 1987 but we were in the market by then. Welcome back @SatayKing

 

Great to hear everyone’s experience here!

I didn’t have any exposure to the sharemarket in the GFC, but I still felt it... the interest rate on my savings account crashed! Who says cash is safe

In 1987 I didn’t have exposure to anything...not even oxygen. I wasn’t born yet

 

Similar here. Did most things one shouldn’t as I was somewhat clueless back then. But the experience was extremely valuable and as mentioned by @SatayKing it help grow some bigger ones.

I’m not game to put a lighter under them though as there’s always danger of this:

 

I've just realised that so far my main risk mitigation strategy has been to avoid being an investor. My whole journey since 1999 has basically been trading shares, property and precious metals and that is how I've avoided risk. Through good luck or good management I've never actually experienced a downturn in anything because I've always ridden the wave and got out and on to the next opportunity. I've developed properties but as soon as the profit was realised I'd sell and on to the next one.
And here I was thinking that I was an investor.

It's time to settle down and start a portfolio.

Willy

 

This is a really good example. For an invested person to profit from a market crash scenario they need to make two very good decisions, not just one; and remember CGT and brokerage costs.

The other key point is to buy through the crash as it's the only way to get some shares at bargain basement prices without having the power to see the future.

I'm currently keeping powder dry and saving. With some conviction I might deploy a small percentage in ETF shorts (3 Bears – learn more about going short with ASX-traded funds | BetaShares), however, based on the premise, I'll still need to make at least one good decision and somehow curb my greed. I'm also planning on going into manageable debt to buy equities if they've gone down certain orders of magnitude - e.g. 20, 40, 80%.

It may fail dismally, interested in any thoughts.

 

I believe that comment “100% shares” needs to be clarified.
I was going through divorce during the gfc so had no money invested or to invest in shares during the gfc until property settlement well after the recovery in 2012. Then I invested in all the wrong shares - the new bright stars looking for a 5 or 10 bagger. However I still had a reasonable income so it didn’t bother me too much.
Unfortunately, my sister who was 9 years older had retired. She had her super in a ‘wrap account’ managed by a ‘wealth advisor’. He suggested to her to reduce her shareholding in banks and also to reduce her cash reserves to provide more funds for inclusion in the wrap account. First five years in a growing market were good for her as he traded upwards successfully and increased funds under management but during gfc you could see the desperation start in the search for shares likely to provide a quick capital gain or those offering very high yield with little value rather than any selection considering long term dividend income. The result was that she lost significant % of her wealth - so much that she qualified for a part aged pension. This was during a time when she was battling lung and other cancers.
I only found out the above as her executor and through trying to piece together what went on for her during the gfc.
To my mind, she was advised to be in “100% shares” but it turned out to be “100% in the wrong shares” - as I intimated very few of the shares recommended to her seemed to have any long term increasing dividend history as part of their selection process. Some might even have been selected solely because of the very rosy wording in IPOs. I tried asking the ‘wealth advisor’ but he communicated very little to me about justifying the portfolio.
I wish we had both known about AFI, AUI, ARG, BKI, MLT or WHF back then. I’m sure it would have made a big difference to her ‘sleep at night’ factor.

 

Such a very common, and really sad story. When I was young I purchased a PPOR, and was doing well, paying extra repayments, then the "recession that we had to have" happened. Paying high interest rates and having a new family, I was asked by the bank manager if I wanted to invest in the banks "new managed funds" as it would help me pay off my property "fast" by paying the minimum mortgagee repayments and paying the extra repayments into the banks "new managed funds", and take out a line of credit for managed funds. I thought that the bank manager "must be right", so went along to the Financial planner (that I paid for) to set it all up. Big mistake. In the end the banks managed funds folded. Many years later I received a letter that I had opened a margin lending loan, which I had not, and they were closing this margin lending loan. A few letters back and forth, it was uncovered that the financial planner had signed my name to a margin lending loan without my authority as at the time there was some type of bonus in it for him. Fortunately, the margin lending loan had never been used.

 

This is why so many financial planners lost their jobs as a result of the GFC. Not because they were sacked, but because their clients simply left because they had been given such bad advice.
I witnessed first hand the devastation in one prominent firm.

Direct property was actively discouraged in favour of listed property because there were no kick backs or commissions with direct property.
Clients were steered away from precious metals (no kick backs) and told to invest in mining shares if they wanted exposure.
Clients were advised not to sell shares or managed funds when they became nervous about the dizzying heights of the market. Need to keep those trailing commissions coming in.

Everything was at the mercy of the market.......and then the market crashed.

The funny part was quite a few of these so called professionals that people were trusting didn't have two bob to rub together of their own.
They were salesmen with a university degree.

Willy

 

I had an inkling that some financial advisers might have been given sales targets for companies that their employers might have been engaged to undertake the IPO. However, that surely wouldn’t happen, would it?

 

Not sure about that one. Nothing would surprise me though.

Definitely sales targets. Clients were constantly being told to change their investments and fund managers as the planners continually chased the highest trailing commissions.

Hopefully the industry has changed a lot, it certainly needed to.

Willy