Latest / The Curve / RTC5: How do you spread your risk when investing in stocks?

Transcript

RTC5: How do you spread your risk when investing in stocks? · The Curve

• 0:00
  Welcome to the Curve Podcast, a conversation for women who want to learn more about money,
• 0:06
  their money for the future they want to have. We're all busy in the pursuit for financial
• 0:12
  confidence and increasing your wealth should be a simple one. That's why the curve was created.
• 0:17
  This podcast is for women to learn about investing in a non-scary or intimidating way.
• 0:22
  With short episodes, you'll have time to learn, digest and understand everything to do with the
• 0:28
  world of investing. Don't expect to be an expert on day one. No question is a silly question.
• 0:34
  If you're asking it, so is everyone else. So thank you for being here and for listening,
• 0:39
  because together we really can raise the curve. I must say that I'm starting to feel like
• 0:46
  apart from the fact that we've listened to these episodes back, we both sound kind of like men
• 0:50
  and maybe need to smile a little bit more. Yes. I feel like I'm definitely starting to understand
• 0:56
  and feel like we're moving. I know the sounds kind of like a G, but it does. It feels like each time
• 1:01
  we talk about the stuff, it's building on it. It's so good, because that's obviously what we want.
• 1:06
  All our listeners to get out of your podcast. I know. It's just one of those things I think,
• 1:11
  investing. You kind of do want that quick fix. Last time you said something like, if you want a quick
• 1:16
  fix, go to the casino, but it feels really good to at least be moving through and building on
• 1:22
  the knowledge as we go. It's really cool. Totally. Thanks for sharing.
• 1:27
  I actually am feeling also quite inspired by the home. I know today we're talking about diversification.
• 1:32
  And you've talked a lot about the time horizon. I feel quite grateful to be learning about this now,
• 1:38
  as I'm 30 rather than 75. Totally. I finally had done this when we were kind of 18.
• 1:45
  We learned this at school. I know. It's such a shame. We learned how to play the recorder
• 1:49
  and how to do all those really important trigonometry. I mean, I've used that every day.
• 1:54
  Oh, same. Algebra. Very important. Yeah. Hopefully there's younger people that are wanting to learn
• 1:59
  and kind of starting to realise how important it is to learn as early as you can.
• 2:03
  Totally. Yeah. So today, diversification is our not having all our ex and one basket in
• 2:09
  analogy, right? Yes. Exactly. That is diversification. So what does in terms of that, you know,
• 2:16
  we've gone over the asset classes and how, and I'm guessing diversification except in much more
• 2:23
  depth is essentially investing in lots of different asset classes. Exactly. Yeah. No, that is
• 2:29
  spot on. So I'm such a good student. Yeah. I plus for you. Investing in shares or
• 2:37
  they're just investing in general can be so volatile and so unpredictable, especially if you're
• 2:42
  at the higher risk spectrum of investing. And diversification is just the spreading out of that risk.
• 2:49
  Yeah. Like we said, don't put all your eggs in one basket. If you drop that basket,
• 2:52
  all your eggs are gone. And you've got no breakfast. No breakfast. No expedition. No scrambled.
• 2:58
  Nothing. Nothing. Exactly. Whereas if you are carrying two baskets and you trip and you drop one,
• 3:05
  you've still got one basket of eggs left. So it's the diversification is not putting all your
• 3:09
  eggs in one basket. We say that because with investing, you always make bad decisions. You always
• 3:15
  make mistakes. It's even the best investors in the world still make mistakes because there's
• 3:21
  such a level of uncertainty and unpredictability when it comes to investing. You can't
• 3:27
  foresee things as clearly then yet you just want to make sure that you're investing in different
• 3:32
  asset classes and we say different asset classes because asset classes move in different ways.
• 3:37
  They have different market forces, I guess you'd call it. So say the stock market has a
• 3:42
  total shits itself or something, but you have invested in a term deposit. Or you have property and
• 3:49
  the property market is completely separate from that share market. Yeah. And then it's also
• 3:54
  diversifying within, it's not just about exactly what I was going to ask you. It's diversifying
• 4:00
  within that again. So diversifying isn't just diversifying across those asset classes, it's diversifying
• 4:06
  within them as well. So when we say put some money in a term deposit and put some money in shares,
• 4:12
  it's then also going well within that share, that bucket of your share investment,
• 4:16
  diversify within that again, invest in a few companies or a few sectors.
• 4:21
  In different industries. In different industries exactly. So it's diversification or diversification,
• 4:27
  it's the more you can diversify the better in my opinion. So you could have a million different
• 4:31
  baskets of beds and that would be the way to go. Yeah, there is kind of a statistical analogy around
• 4:37
  two minutes, two minutes, I think I kind of say like 20 to 30 stocks is when you kind of reach
• 4:42
  your peak diversification. But I mean, that's that much money anyway. So for D.I. Y invest in
• 4:48
  you, that's just when we talk about like what I do from a day to day basis is kind of saying that
• 4:54
  20 to 30 stocks is the kind of where the tipping point of diversification, I guess. It's just saying
• 5:00
  that it reduces the risk of around making one bad decision. And I think if you had all your
• 5:06
  eggs in one basket, you made one bad decision, you've lost all your life savings. Like that is
• 5:12
  terrifying. That is terrifying. No one wants to be in that position. So just make sure you're
• 5:17
  kind of spreading that risk. In Ron example, ages ago, just kind of before my time. But anyway,
• 5:23
  and that was a big energy company, considered a very safe investment. And investments were as
• 5:29
  I are until they're not. And everyone that invested in that lost all their money. So it was,
• 5:34
  it's kind of people that had maybe had 20% of their investment in that and 80% elsewhere come
• 5:40
  out better off. They get a little scrape, but they don't lose their whole life. Exactly. You're like
• 5:44
  damn it. I stupidly invested an error on. But rather than like, oh my god, I now have no money.
• 5:49
  And I'm starting, I'm starting again from scratch that that is, that's super depressing.
• 5:54
  That's a passion. Yeah. So it's such good. It's so good to know that because and that is the
• 5:59
  absolute reality, right? There will be that investment that you lose everything from.
• 6:04
  Exactly. And it's not, it's not just on the downside. It's, it's not just a negative view.
• 6:09
  It's also better to think about it. It could increase your odds of success. So you might invest in,
• 6:14
  say, five companies and four, four of them kind of do all right, you know, maybe one, two,
• 6:21
  five percent per year or whatever. And then there's one that just blows the lights out and does
• 6:26
  50% and you're sitting there going, wow, if I hadn't diversified into that fifth stock,
• 6:31
  my wealth at the end of 12 months and my, my size of my investment would have been a lot lower.
• 6:36
  We try to say, yeah, as long as you have more, more winners than losers. And if you had five stocks,
• 6:41
  you only need one who wants three of them to do well. Yeah. You only need, you only need
• 6:45
  food to do well. And hopefully, on average, it all went out and you have a great returning,
• 6:50
  returning investment. So it's just, yeah, increasing your odds of investment success. Another way to
• 6:55
  think of it is no one knows for certain what's going to happen or who's going to win the race. So
• 7:00
  let's bet on a few horses. Can we stop going back to gambling? I must say I hate gambling.
• 7:07
  Sorry. Let's think about a different example. It's like saying no one can know for certain
• 7:11
  of kind of who is going to win the race or what company is going to do well. Yeah. Okay.
• 7:16
  And what the market's going to do. So let's invest in a few and spread that risk and in the hope
• 7:22
  that at least a few that I pick will do will do well over the long term. And that's bringing your
• 7:26
  risk down massively. Exactly. Yeah, you can't really talk about diversification without talking
• 7:30
  about risk. And if I think of a every day example, one I, when I heard of the other day was like a
• 7:37
  street vendor, for example, that sells fruit. And if he only sold bananas and there was a massive
• 7:43
  massive drought that wiped out all the bananas, he'll have nothing to sell. So if you were that
• 7:51
  street vendor or you invested in that just that street vendor, then your return would be he's got
• 7:57
  nothing to sell. He's got no money to make. He's got no revenue, no profits. If that street vendor
• 8:02
  himself had diversified and was selling oranges and bananas and mangoes and strawberries. Yeah. Exactly.
• 8:08
  He's rich. He's spreading his risk around with the fruit. And also if you'd invested in that street
• 8:13
  vendor, and you'd also invested in an orange street vendor and a strawberry street vendor,
• 8:18
  then you're also spreading your risk. It's investing in a whole bunch of staff that allows you.
• 8:24
  Exactly. Fingers and lots of pies. Okay. It makes your journey of being financially secure in
• 8:31
  the long run. Less risky. Less risky. And hopefully more successful. You know, investing shares,
• 8:38
  and when I say you can diversify across different asset classes, you can also diversify within asset
• 8:42
  classes. An example with that would be during COVID and investing. If you had all your eggs in one
• 8:48
  basket that was flight center or travel stocks and when the world went into lockdown and there was
• 8:54
  no travel and there was no one was getting flights, you would have lost a significant amount of
• 8:59
  your investment if you just invested in those companies or that industry, whereas if you'd invested
• 9:04
  in a few of those those travel stocks, but you'd also invested in e-commerce companies or
• 9:08
  supermarkets, supermarkets or Amazon or online retailers that have done significantly well
• 9:15
  out of COVID, then net net. You would have lost in the travel department. Exactly. That gained
• 9:21
  in others. Yeah. So net net you hopefully would have been on par or slightly better. So
• 9:26
  does net mean leveling it out? Yeah. So if you if you net it off your winners and your and your
• 9:31
  losers or your your gainers and your losers, then net net you would have been hopefully in an
• 9:37
  okay position rather than just investing in flight center. Yeah. Yeah. I guess then the flip
• 9:45
  side of that is like, oh, you could have invested you could have invested entirely in e-commerce
• 9:49
  and online retailers and Amazon and you would have done fantastically well. It's like, yeah, but
• 9:53
  that's how you met your not to know and the thing is nobody saw COVID coming. Nobody could have
• 9:58
  predicted the impact and the fact that 12 months later we're still not traveling because there's
• 10:03
  no visibility. There's always things that come out of the blue. Is that the more that you can
• 10:08
  diversify and the more you can spread your risk, the less those blindsided things that come
• 10:13
  really naturally blindside you every day there's going to be something. There's always things that
• 10:18
  impact the market. It might be a political situation, change of regulation that might just
• 10:23
  companies revenue because they now have to abide by new regulation. You know, there's always things
• 10:27
  that come out of the woodwork that you don't expect. And so it's really, really, really important
• 10:32
  to diversify across different different stocks and different companies.
• 10:36
  I feel like that's really sunken. Yeah. And same with property, for example, within that asset class,
• 10:41
  if you can afford to invest in multiple properties, invest in residential and commercial,
• 10:47
  even though the asset class as a whole will move in the same way within that, you know,
• 10:52
  there's something disastrous might happen to one property and then you've said,
• 10:56
  at least you've still got another one and that kind of thing. I wish we could invest in like
• 11:00
  dog kennels or something like something that was much less expensive than a house. I
• 11:05
  don't want to say the thought about that. I'm just like, oh, I need to diversify and
• 11:09
  kind of buy a door handle, let alone a door or a house. And that's the great thing about
• 11:13
  BC and shares is that it's you can start lower. Yeah, you can start with $50, you can start with
• 11:17
  $100. And I think as well, just hearing you speak about learning from your mistakes and kind of
• 11:22
  growing from that, it's cool that you can do that with the share like stocks and shares. You can't
• 11:27
  do that with property. You can't go and buy a commercial property and then have the whoopsie
• 11:32
  and learn from it. It's not the same. Yeah. So if someone can't afford a deposit for a house,
• 11:36
  you can still dabble in investing and learn. It's just not the same amount of capital you're starting
• 11:42
  with. $200,000 deposit to be able to buy an average house in Auckland. It's just like, it's nuts.
• 11:49
  And there's the benefit of being able to get out quickly if you do make a mistake or if you do
• 11:54
  need your money. Can I ask you what you've done and how you've diversified? Yeah, I guess I have
• 12:00
  invested in property. I bought a property about five years ago. I also invest in shares and I've
• 12:08
  also diversified by investing in different funds. I also get asked a lot by friends, hey, I want to
• 12:14
  invest with this fund manager, you know, what fund would you suggest? And I tell them, look, I can't
• 12:19
  kind of give you advice, but you should just always diversify. And if you can't decide
• 12:25
  or you don't want to put all your eggs in kind of one growth fund, why don't you diversify
• 12:30
  and put some in a more conservative fund and some in a growth fund? And does that mean within
• 12:36
  the same company or do you mean even as far as going from a different fund manager to a different
• 12:41
  company to another one? Yeah, I mean, if you had the funds, invest across different fund managers,
• 12:45
  that's even further diversification. Yeah, you can diversify with different fund managers,
• 12:50
  you can diversify different funds at those fund managers. And the great thing about investing
• 12:57
  in a fund is that the fund manager diversifies it for you as well, because they're investing in
• 13:02
  anywhere, depends on the fund, from like 20 companies to, you know, 60 to 100 companies.
• 13:07
  So that's kind of what you pay a fund manager to do for you is that diversification.
• 13:13
  Because they've got it like a pool of money, right? They've got the experience and they've got
• 13:18
  ability to do that diversification for you. And you know, when you invest in a growth fund versus
• 13:25
  a kind of conservative fund, the growth funds usually mainly shares, so it's a bit more high risk,
• 13:31
  and then the conservative funds are usually cash investments or bonds, yet low risk share,
• 13:39
  but fixed return. Yeah, there'll be low risk. Can you notice me trying to throw in my knowledge here?
• 13:44
  I'm like, who I know to bond is conservative funds are usually cash. So there might be a bit of
• 13:50
  term deposits in there. There might be some bonds in there. There might be some small, small,
• 13:55
  small allocation to shares and companies. And when I say low risk companies, I'm talking about
• 14:01
  companies that are very low growth, but defensive. So think about, yeah, your electricity
• 14:09
  companies, your utility companies, companies that people use all the time. There's not a lot of
• 14:15
  room for them to totally fall to the ground. I mean, there's still a risk because they're still
• 14:19
  you're still investing in shares, which are high risk, high risk, high risk, high risk,
• 14:24
  generally, but because there's such a small allocation to them within that fund, the overall
• 14:30
  fund is low risk. And you usually pay fees wise, you'd pay lower fees on the more conservative
• 14:38
  fund than you've got on the higher risk fund. And then there's usually a balance fund within
• 14:43
  there, which is a combination of both. So diversification, diversification, diversification,
• 14:47
  if you if you've separated your investment across fund managers, then separated it across funds,
• 14:52
  and then the fund manager or the portfolio manager of their fund diversifies across companies
• 14:57
  for you. So you've got your property and you also have your obviously invest in shares and
• 15:02
  in the stock market and things that you see and you believe in. But then on top of that, you also
• 15:06
  give your money to fund managers to then do it for you as well. So you've that's so interesting.
• 15:11
  I would have thought that you would just do it all yourself because that's your job. Yeah, it's
• 15:14
  cool to know that you also are trusting those people with your money. Yeah, because I don't,
• 15:18
  I mean, I think gosh, I can I always make mistakes as well. So I guess I maybe should back myself
• 15:24
  a bit more, but I just love diversification. And I think it's it's get the more you can do it
• 15:30
  the better. And even with an even in the portfolio that that I'm in it, my own personal money that
• 15:34
  I that I manage that I've gotten shares, I've diversified. I'm very conscious to not invest in
• 15:40
  a multiple companies in the same industry, try and look and find, okay, well, what's the best
• 15:45
  company within that industry or hang on a second, I've got a lot of investments in clean energy
• 15:51
  or solar companies. So if there's a change in regulation or there is a change to that industry
• 15:57
  that could affect all those companies, then that could affect my whole my whole portfolio, my whole
• 16:02
  share portfolio. So looking at your portfolio and going, okay, cool, I might have one healthcare
• 16:07
  company, one retailer, one financial company within my share portfolio, there's not there's not a
• 16:14
  whole lot of eggs in one basket. Do you know what your fund managers are investing in so that
• 16:22
  what you're investing in from your personal portfolio is different again from that? Yes, yes,
• 16:27
  so they disclose what they invest in and they usually only disclose kind of the top the top
• 16:32
  holdings, but what is top holdings? Oh, like the top positions in that fund. So at the top five
• 16:39
  or ten positions. Is that the biggest earners? It's the percentage of money that goes to those.
• 16:43
  Exactly, yeah. But I kind of figure that, yes, you don't want to be doubling up, but it's
• 16:48
  diversified enough if that makes sense. So you're not checking what they're doing and making sure
• 16:53
  you're not doing the same, you're not like looking at your portfolio and saying, oh, they've also
• 16:58
  invested in flights into I1? No, and it's a bit hard because fund managers, it's so fluid and you
• 17:04
  don't get to see what they're investing in day to day. They only give you kind of a static update
• 17:08
  every month, for example. So it's hard to to try and decide what not or what to invest in. You're
• 17:14
  not really comparing apples with apples if that makes sense. You're already diversifying by giving
• 17:18
  some money to a fund manager. So I'm happy with with that and it's micromanaging. Yeah, I'm not
• 17:23
  trying to microman it or trying to match up to make sure I'm not in what they're in and it's
• 17:28
  you give your money to a fund manager on the premise that they are an expert in what they do and
• 17:33
  then they're trusting. Yeah, you're trusting them to make the decisions for you. I mean, some
• 17:37
  people do the opposite and try to double down and think, oh, that's what they're picking for
• 17:41
  investing. Oh, I'm going to go in. That's their top five positions and that fund, I'm going to go
• 17:46
  in and invest that directly myself and then you're kind of undoing your diversification.
• 17:52
  Deversification? Fantastic news. You're kind of doubling down on what they're
• 17:58
  investing in. You're just giving them more money for that fund. Yeah, exactly, exactly, but some
• 18:02
  people kind of like to do it themselves and the thrill and the excitement of kind of investing
• 18:08
  themselves, but they then again don't know when that fund manager is getting out of that position.
• 18:13
  True. So there might have been some users come to light that they actually sold that position
• 18:17
  in youth. Five years later, you're still earning it. So diversify diversify diversify across
• 18:24
  anything within the same asset classes just as much as you can. Yes. Yeah, diversify diversify
• 18:30
  diversify. Is there too much in terms of, I know you mentioned before that, you know, 20 or 30
• 18:36
  in terms of the stock market is probably as broad as you would go. What about the percentage you're
• 18:41
  giving someone is, you know, a thousand dollars here, a thousand dollars there, is that too,
• 18:45
  is it spreading yourself too thin? Are you better to maybe have five ways that you diversify and
• 18:50
  keeping it as a solid amount of money? Yeah, I think it kind of depends on your personal situation.
• 18:56
  And some people might, you might not have the ability to diversify, you know, particularly when
• 19:01
  it comes to property, like that's, you need a big chunk of money to be able to hold a little
• 19:04
  here. If we just, yeah, if we just talk about the stock market, then maybe each time that you,
• 19:09
  you want to kind of invest new money, you know, maybe look at an idea that's, that's not currently
• 19:15
  what you're investing in. So, yeah, say you have, you know, a few companies, say you've got five
• 19:20
  companies across healthcare, you know, a retailer, a, you know, a media company, and then the next one,
• 19:26
  oh, maybe I'll look at more of a financials company and try and find, you know, some people like
• 19:30
  to stick to industries they know as well, and invest in, I'm just going to invest in healthcare
• 19:35
  companies and diversify within, because I know them. Because I know, maybe I'm a next doctor or,
• 19:40
  you know, connected to it in some way. Yeah, and I will just diversify within that sector,
• 19:44
  and that's totally fine. It's, don't think, oh my gosh, I have to hold a bank, because I need
• 19:49
  to, yeah, and if you don't know anything about banks or investing in banks, and then you literally
• 19:57
  are just throwing data to the dashboard and hoping that, oh, this bank that I invest in will do
• 20:01
  else. So it's, it's, it's not spreading itself to thin, I guess, is what I'm saying. That's good
• 20:06
  advice. Don't get too hung up on it, but the more you can do it, the better. Yeah. Okay, brilliant.
• 20:11
  Diversification. Not diversification. Exactly. Not diversification.
• 20:17
  What are we going to talk about next time, Burke? So next time, I think we really need to talk about
• 20:22
  what moves the stock? What does the sheer price mean? What moves the stock market? Because we're
• 20:27
  talking about diversification, we're talking about how these asset classes move different ways,
• 20:30
  and but what moves the sheer price? So we're actually going to focus on one asset class,
• 20:34
  and how that particular asset class, IE, the stock market moves, and why? Yeah, exactly. And I think
• 20:40
  that's, that's, that's a really kind of exciting, exciting topic topic. It's especially because,
• 20:45
  and I'm speaking for myself here, but I don't have what they did diversify into property. So
• 20:50
  to really focus and hone in on the stock market, I think, is a really cool start, because it feels like
• 20:54
  whether you have 5, 10, 50, 50,000, it's something that we can all dabble in and start to learn more about.
• 21:00
  And what is, what is the sheer price of a dollar mean? What is the sheer price of $250
• 21:05
  mean? We'll really break that down so that you can kind of look at a sheer price and look at a,
• 21:11
  look at a company and figure out what to invest in. Oh, I feel excited. Great. You don't sound
• 21:17
  excited by the way. Great. Yeah, no, it should be, it'll be really exciting. It'll be a good episode.
• 21:23
  As they all are. Yeah, God be good, aren't we? Thank you so much for joining us on today's
• 21:29
  episode of Raising the Curve. Please subscribe to the podcast and leave a review on what ever
• 21:35
  platform you're listening on. For more information about the curve, the work we do,
• 21:40
  and how you can learn more, head to thecurve.co.nz or find us on socials at the underscore curve nz.