We’re all wrong sometimes in this business. You only have to be right a little more than 50 percent of the time to do really well.
—Dawn Fitzpatrick, CEO and CIO, Soros Fund Management
When we were living in Europe, an older neighbour of mine used to describe money like the tide. It came in. It went out. There was little he could do about it.
While this was a relaxing way to look at things — at least when the tide was in — I like to think there is more you can control.
Source: Image by Roman Grac from Pixabay
A new financial literacy curriculum is to be rolled out next year in New Zealand schools. While this is a great thing, it looks set to be delivered by the Retirement Commission, mapping the offerings from financial education providers.
I hope it will not only teach from the wares of educationalists and big banks (who are some of the providers) but also inspire students to become prosperous.
There is also something more important.
Financial literacy is only part of the journey. What we really need to develop in New Zealand is financial resilience.
According to the Financial Services Council’s Resilience Index: ‘55% of New Zealanders — equivalent to just over two million people — worry about money either daily or weekly.’
The best financial education I ever received
It was the late 1980s.
Our fourth form (Year 10) business-studies teacher invited a visiting entrepreneur to come and speak to us.
He was a Ferrari-driving millionaire from the US who had built car dealerships and a property empire, if I remember correctly.
1987 Ferrari 328. Source: Wikimedia Commons
He gave simple but powerful advice: ‘Set goals and build things.’
For straightforward Taranaki boys like us, goals were something you marked on the field with jerseys.
Looking back, something surprising happened. The goals I set years ago, from this advice, ended up being achieved.
Then in the sixth form (Year 12), I got involved in Young Enterprise — a business competition for high school students that today is a provider for the financial literacy initiative.
And that is the other useful part of the puzzle. If you want to be financially resilient, it can pay to have more than one employer. Business owners have many employers: their valued customers.
These days, amongst our wholesale clients, many are business owners or former business owners. Especially those with larger portfolios.
When you have built some capital, buying shares is another way of owning pieces of some really great businesses.
Becoming resilient by managing risk
Most worthwhile things in life carry risk. Starting a business. Building a relationship. Travelling to a new place. Investing in global markets.
Developing financial resilience doesn’t mean hiding from risk and going nowhere.
It means understanding risks and being prepared to navigate them.
Here are some of the key risks…
Market drawdowns
When investing, you have to be mentally prepared for market panics when your portfolio could drop 10%, or in the case of the Covid emergency, even 30%.
Some believe they can time the market. Selling up before drawdowns. They usually sell far too soon and destroy long-run return.
In time, the market recovers. In the months or years that follow, it pushes higher than it was before.
Drawdowns are often a good time to buy and consider portfolio resilience.
Buying bad businesses or properties
Listed businesses on the stock market have a large amount of information available. From audited financials to analyst reports.
When you’re buying a small business to operate, it’s harder. There are things you cannot see. Things that change when a new owner takes the helm.
An accountant friend was telling me the other day about someone who paid $1 million for a business before Covid. Today, it is worth practically nothing. Yes, the market changed. But this person also failed to invest in detailed accounting work on that business before he bought it.
To a lesser extent, these risks apply with property. You cannot see everything that is going on. For example, seasonal water ingress. You are putting your eggs in one leaky basket.
Overleveraging
Borrowing to invest magnifies both profits and losses.
In the case of drawdown or having bought the wrong asset, leverage can be destructive to wealth.
When used reasonably, skilfully, and for compelling opportunity, it can accelerate wealth.
Bad relationships
Source: Reads with Ravi / X
The late Charlie Munger cautioned people ‘to avoid toxic people and toxic activities’.
As a rule, you should ‘deal with reliable people, and you do what you’re supposed to do,’ he advised.
While this might seem obvious, it takes maturity and experience to become a wise judge of character.
Legal attacks
A significant risk to wealth is legal risk.
It can be prudent to consider a trust if your business activities expose you to personal risk. An independent trust can put your assets out of reach.
The government should avoid limiting trusts, as that only stops people investing.
Here in New Zealand, we have this strange situation where expensive legal fees compromise justice. In the US, all parties are responsible for their own costs in bringing or defending actions. In New Zealand, much of these costs can usually be claimed on top of any award. A losing party can end up paying for both sides.
One of the best things I did was spend three years studying commercial law. A working knowledge of the law can help protect you. Further, AI is helping bring the complexity of legal interpretation to more people.
Health challenges
I often come across happy, prosperous people who are hit by unexpected health challenges.
The New Zealand system will help you in the case of an emergency. Those in the system tell me you are best to have this emergency from Monday to Friday, during regular business hours!
Most other issues will involve you waiting on a stretched public system. Some areas of surgery are desperately short. Australia pays many of these professionals up to 50% more.
Health insurance enables more immediate access, but becomes very expensive as you age.
I look at the cost of health insurance in terms of opportunity cost.
If you want to ensure access without paying for insurance, you might need to ensure you have, say, $100,000 available for procedures.
If you could achieve 10% on $100,000 via investing, then the opportunity cost of ‘self-insuring’ is $10,000, less any return on liquid cash.
In that case, it may be worthwhile putting up to $10,000 a year into insurance (if that affords a decent policy for you) and investing the $100,000.
Further, there is the added consideration of what access and other services an insurer also provides.
A financial journey is seldom without setbacks
Developing resilience means ensuring that a setback allows you to learn, regroup, and strengthen — as opposed to being washed up.
So when the tide does go out, you’ll be ready.
Are you looking to invest for financial resilience?
Here at Wealth Morning, our investment strategy is value-focused across developed markets, with a focus on opportunities beyond the usual radar.
We aim to build up strong and income-rich portfolios for our Eligible and Wholesale Clients. It’s a true partnership where the Principals’ own money is invested in the same strategy.
We’d love to get a sense of your investment journey:
- Do you have previous experience in investing?
- Are you a sophisticated investor?
- Or have you built significant wealth?
All these characteristics could qualify you as an Eligible or Wholesale Investor for a managed account under our strategy. The assets remain in your name, and you retain full ownership and custody of your assets.
We are currently offering free consultations on this opportunity.
Regards,
Simon Angelo
Editor, Wealth Morning
(This article is the author’s personal opinion and commentary only. It is general in nature and should not be construed as any financial or investment advice. Please contact a licensed Financial Advice Provider to discuss your personal situation. Wealth Morning offers Managed Account Services for Wholesale or Eligible investors as defined in the Financial Markets Conduct Act 2013.)