How can you save yourself from imminent disaster?

If you were aware of a tidal wave sweeping towards your house do you think you would take evasive action? I know what I would do – I would grab my family and get out of the way! That is, if I had time.

Do you remember the tidal wave that swept across Aceh and much of Asia on Boxing Day 2004? The damage it caused was devastating. The people who lived by the shoreline did not have much warning that disaster was almost upon them, but those who lived further afield had some time to get out of its path of destruction. There were hundreds of thousands of casualties and, even worse, deaths. Families’ lives were torn apart within hours and many are still trying to put the pieces back together.

Have you noticed the tidal wave of disaster hitting the finance companies in New Zealand at the moment? Like a huge wave there have been many companies, both small and large, to close their doors and freeze investors funds. For some this is like their house being swept away by a wall of water, and many have been left with nothing.

I am not trying to say that this “wave” was something that we could all for-see, but then I suppose if you were listening to the international news it was predicted. And when the first company collapsed in a flurry of media noise the writing was on the wall. Regardless of whether it was obvious or not the damage has been done. The question we must ask ourselves from this is “what can we learn from it?” Here are two lessons:

Diversification:

Don’t put all your eggs in one basket – it’s that simple. Never before in the history of the world has it been safe to place all of your investment funds into one single investment. If you took that risk there is a high chance that you lost all of your money before you could do anything about it. By spreading your investment across a number of funds you can reduce the risk and buy yourself some time if the market does start to collapse.

If you are more serious about protecting your investment you would also manage your risk by diversifying across asset classes. By this I mean investing a portion of your total investment in finance companies, but then also investing a portion in property and shares. This way, if the entire finance market collapsed there is still security for you in the other markets. It would take another “Great Depression” for all markets to simultaneously collapse at once.

Risk vs. Return:

When investing the key question to ask oneself is “how much risk can I be prepared to take?” Sure it’s fun to chase the higher returns but the natural laws of economics apply and no one is able to avoid them. The laws of economics dictate that when an investor chases a higher return there is always a corresponding increase in risk. Therefore, those that chose to invest in Finance companies for the higher interest rate (when compared to a bank deposit) must also accept that their investment was at a higher level of risk. Risk means possible loss, and that has occurred for some investors.

As always my desire is for lessons to be highlighted from our experiences of life, both good and bad, so that we can always improve things for ourselves and others next time. So I’ll leave you with these two questions:
i) what have you learned from the investment market lately? and,
ii) who can you share this lesson with so they can grow as well?

If you keep learning you will keep progressing.

Phil Strong
CEO Wisemoney