Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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A global survey of investors suggests that there are Seven Habits which characterise those who manage their financial affairs in a highly effective way. Do you exhibit any of these behaviours?

According to the survey[1], those who are able to consistently apply these habits are twice as likely to be confident they are making the right savings and investing decisions, twice as likely to say they enjoy managing their investments and have more than 2.5 times the retirement savings of others.

1.     Regularly Review Finances

Many people have little idea of where their money is being spent, with one study suggesting that fewer than 40% of people track their spending very closely[2]. Perhaps as a direct result of this, further research suggests that 40% of people will never gain a net worth in excess of $10,000[3].

Financial self-awareness and the ability to defer non-essential spending is the fundamental step in being able to become a saver or investor. Most people are aware that as their personal income increases, so will their expenditure; however fewer are easily able to reduce spending if their income falls.

2.     Spend Time To Get Informed

Knowledge is empowering and creates confidence. A good rule-of-thumb is never to invest in something that you don’t understand or can’t explain easily. There’s no need to become a financial engineer, but a grasp of simple investment concepts will help. For example, understanding if your investments will make you an owner (shares) or a loaner (bonds), will help frame your understanding of investment risk and ensure that you sleep at night without undue anxiety.

3.     Seek Financial Advice

Seeking advice does not mean sacrificing ownership of your investment decisions. A good adviser will discuss financial matters collaboratively with you, not from a position of assumed superiority. If ever you feel that your interests and concerns are not being taken seriously, or are being taken flippantly, you should probably seek advice elsewhere. Advice from family and friends can be helpful and trusted, but it will be limited to their frame of investment experience, which simply means you won’t necessarily learn everything you need to know.

4.     Manage Debt

The key word here is “manage”, which does not infer “eliminate”. Debt can be a useful tool in achieving certain financial goals and is an essential tool for most people seeking to acquire a substantial asset such as their home, or an investment property. But debt that makes you poorer can be described as “bad debt”. In other words, debt where the cost of borrowing exceeds the value created by the loan, may not be in your best financial interest. Typically, money borrowed for motor vehicle purchases, to fund negative credit card balances, or other consumer loans can all be characterised as forms of “bad debt”.

5.     Prioritise Saving For Retirement

By deducting savings before discretionary income, KiwiSaver is now an effective way for New Zealanders to save relatively effortlessly for retirement. But beware of a false sense-of-security. Most savers will discover that there’s likely to be a significant gap between their desired income in retirement and the income that their accumulated savings will generate. That’s why it’s important to supplement regular retirement savings with any wind-fall lump sums which may arise from an inheritance, an employment bonus or any other one-off payment.

6.     Diversify Portfolios

While the principles behind this concept are generally well understood, less well known is the need to diversify within asset types, not just across them. This may mean holding fixed interest investments with different maturity dates or credit ratings to maintain and enhance yield. Or investing in company shares across complementary economic sectors, with a combination of growth and income characteristics.

7.     Plan For Big Moments

This not only means ensuring that you have a readily accessible rainy-day-fund in the event of unexpected financial stress (e.g. temporary loss of paid employment), but that you plan ahead for any major financial events that you are (or hope to be) fully in control of, other than your retirement. For example, payment of your children’s tertiary study fees, replacement of motor vehicles, or essential house maintenance.

In summary, there’s no quick-fire mechanism to ensure future financial prosperity; patience and planning are key. While the early bird may get the worm, it’s the second mouse that gets the cheese. That means that when it comes to investing, cultivating those habits which focus on both the process and the opportunity are most likely to realise the financial success you seek.

[1] BlackRock Global Investor Pulse Survey – November 2014

[2] KeyBank; Harris Interactive (US)

[3] American Dream Education Campaign (US)

Richard Dwyer
Director, Private Client Services