I don’t believe the phrase “don’t put money in the share market that you can’t afford to lose”
29 Nov, 2020
I was hugely excited to sit down and write this blog post. The number #1 reason is because I’m writing from my new space, The Happy Saver HQ if you will! It is a purpose built creative space in the garden where I can come to write about money, to talk privately on my “phone a friend” calls where I help people talk about their money and to have video calls without the whole family trying their hardest not to make an appearance! At my feet I have both the dog and the cat, both insisted on joining me and neither would accept no for an answer! Mind you, the cat will go in and out ten times as I type this, because cats are a pain in the ass 🤣. But my trusty dog always wants to be with me and having just finished a morning walk, he is ready for a snooze.
My coffee is brewing. It’s quiet. I think we have nailed this space and I’m excited by the potential it offers me. And Jonny! It’s his space to use as well.
It has taken us three weekends of toil, plus a few weekdays as well and to be fair, Jonny did most of the work. Still, it was a team effort, but as with any good team, we each have different strengths. His precision and dedication to a task while being pretty handy with a skill saw and a nail gun is a huge marital bonus. Mine is swinging a hammer, measuring, painting and tidying up. Unfortunately for Jonny, I have a short attention span and once I’ve seen how one wall is put together I tend to wander off and do something else. Thankfully Jonny is more of a completionist!
So, what to write today?
Well, at first I thought I would write about what’s on my mind. But then I thought that would not be a good idea at all because it’s such a complex and heated topic at the moment.
What’s on my mind is New Zealand’s increasingly stupid housing market. I’m thinking about the people who want to buy a house and can’t get one and also about the people who snap up houses (using lots of borrowed money) to rent out to those who can’t get one.
What gives?
My honest opinion on the housing market is that many who call themselves ‘property investors’ are in fact just amateur landlords/people who bought a second house because they can think of no alternative way to invest and grow wealth. While there are certainly some excellent landlords out there, who run a profitable business, for others in Aotearoa, housing appears to be an addiction and using poor math and borrowed money the only goal is to make a capital gain. There is increasing inequality and it comes down to out and out greed, and the willingness of some to make money out of others. I personally know many people who have made a lot of money by investing in residential property, but I also know many who have failed miserably or are in the process of slowly doing so. To me the math and the expense of owning property other than your primary dwelling just does not stack up at all, but I don’t know how to write about it without getting people’s back up. Nor do I know how a government can legislate for greed.
SO, I’ve decided to move away from that contentious topic because I don’t feel like arguing about it, but I do encourage you to read a few articles that I’ve found that will provide you with good food for thought:
Why your house is a terrible investment - JL Collins
Residential property is now a bad investment - Kernel
Real Estate vs Shares: Which is the Better Investment? - Canstar
I’ll write instead about the well-worn phrase I hear about share investing, which is:
“Don’t put money in the share market that you can’t afford to lose”
I think this well-worn phrase contributes to our over-reliance on housing as the only way to grow your wealth in New Zealand. It helps to cement the commonly held view that it’s best to put your money into “bricks and mortar” and that’s a great shame in my mind because people have turned their back on our strong share market.
When I hear prominent Kiwi’s in the New Zealand investing space I want them to educate and inform me. I want them to show me that investing in something other than housing is a viable option for growing the wealth of my family over time, so that we can prosper while we work in a career we enjoy, so that we can retire to a good life with financial freedom whenever we choose to. I don’t want them to confirm any biases that I might hold about the share market being risky and akin to a casino. Because it’s not.
Yet when they repeat the phrase “don’t put money in the share market that you can’t afford to lose”, that’s exactly what they are telling myself and others.
The 1987 sharemarket crash has a lot to answer for as far as Kiwis scepticism of the share market goes. Everyone knows someone who knew someone who lost their shirt, their business, their home or their farm. But part of the reason some people lost so much money was that they were losing their freaking minds and literally buying any and all shares (much like some are now doing with housing methinks). They were buying shares in anything that moved, with the assumption being that they would go up in value and they were telling their friends to do the same. There was a lot of greed involved. Legislation of the share market was also far different than how it is today and there were a lot of shady practices going on (insider trading for example). People were mortgaging their homes (even with interest rates close to 20%) and taking on lending to invest and everyone was desperate to get in on the action. So, when it all went to the wall, so did the fortunes, borrowed or otherwise of many. What was safer than the sharemarket back then? Housing. And that thought continues today.
Now I realise that I’ve just glossed over a major event in our history so you can read more about the 1987 Sharemarket crash in this NZ Herald article. I’m not sure when it was written, but it’s an interesting read: The Crash
I also blogged a bit about it here: “Don’t look for the needle - buy the haystack”
The point is that this is what people are often referencing when they say “don’t put money in the sharemarket that you can’t afford to lose” and it might have been an appropriate thought back then, but in my opinion, it’s not now. Things have changed.
As luck would have it I’m reading a brand new book that fellow blogger Nick Carr from www.yourmoneyblueprint.co.nz sent me this week. It’s called Money lessons for my younger self: A guide for young adults and I’ll be reviewing it soon for you.
I literally was reading this one page before I sat down to write this. It really jumped out at me and here it is:
5.3 The share market is not gambling (page 117)
If you are invested in globally diversified index funds, then investing in the share market is not gambling. You will hear many stories of people losing large amounts of money in the share market. However, this is not because the share market is a gamble, it is rather that the way they invested is a gamble. Chances are they speculated on individual companies and were not well diversified across many countries, industries and companies. Or they needed the money in less than five years. That is a gamble.
In other words, the way someone invests can be a gamble. But over the long-term, the market itself is not much of a gamble. Companies will continue to be productive and will continue to make money and grow. By having your money invested in as many of these companies as possible, you will minimise your losses and continue to grow with them.
I’m a cautious investor who is averse to risk, yet I invest solely in index funds and ETFs and into my KiwiSaver Growth fund. It is an aggressive approach, but given my situation, it does not feel risky and it certainly does not feel like I’m gambling. I’ve educated myself enough and have now invested in the share market long enough to know that none of these investments keep me awake at night - even in the midst of the sharemarket drop we experienced in the midst of a global pandemic. Even though I know that there are still volatile times ahead.
How so? Because I simply don’t believe the phrase of “don’t put money in the share market that you can’t afford to lose”.
Personally, I don’t put one single dollar into our investments and think “yeah/nah, I don’t care if it makes money or not, I can afford to lose money”! I invest in a diversified mix of New Zealand and international companies so that they can use my money to grow their businesses, provide jobs, grow our economy and as a result share some of their profits with me. Every single dollar that I do choose to invest I’ve already worked hard for and I have absolutely no intention of putting that money at risk. And although technically I can borrow money to invest, I don’t and I won’t. I’m working elsewhere to raise the cash to invest, plus I am reinvesting the cash that my investments are making (the dividends they generate).
This is where some people think that I’ve gone wrong. If the sharemarket is so great, why don’t I double down and borrow money so I can invest more? And earn more.
I will not borrow money. Not for a rental property. Not for investing. Too risky!
Landlords love the leveraging aspect of property and “using other people’s money”, they think I am crazy to miss out on this opportunity. I understand that you CAN make money out of property using borrowed money, but I think that if most amateur landlords/property investors did the math, they will find they don’t make any money once they take all of their outgoings and their own time into account. Nor do they take risk into account either. I’m extremely risk-averse when it comes to borrowing money.
I fully subscribe to the view that “The borrower is always a slave to the lender”.
Time is money. I use my time to go out and work for my money so that I can invest. I can’t afford to lose ANY of that money, because if I do so, then I wasted my precious TIME going out to work for it.
Who can? Who is actually making so much money, that they don’t care that they lose it?
So I get worried when I get emails from people saying they want to:
Dabble in investing
Take a punt on shares
Get into the investing game
Only put in what they can afford to lose
Have a bit of fun
Use their ‘fun money’ to invest
Have a bit of a gamble
So, for the record, I’ve flipped the saying on it’s head and in my view “I only invest money in the share market that I’m confident will double in value many many times throughout the next 20+ years.”
And in order to do that, I only invest in a couple of broad-based funds which don’t just buy one company (which is a risky gamble) but instead buy ALL of the companies. Currently, the funds I use are:
SmartShares NZ Top 50 ETF
SmartShares US 500 ETF
Sharesies - SmartShares NZ Property Fund ETF
Kernel NZ 20 index fund (a very small and more recent addition to my portfolio since we ditched Bitcoin)
I don’t view them as risky, because I have spread my risk across a very wide range of sectors and companies. And that includes housing because I own my own home.
Nor do I buy individual companies as a satellite holding “just for the fun of it”. I find my fun in other ways. How much “fun” would it have been to have a “play” with AirNZ stocks just before COVID hit? No fun at all. People who have fun investing in individual stocks are not really having much fun when they run for the exits and sell at a loss when prices drop. I have chosen to invest in the share market so that I can be a very small part in a huge number of fantastic companies who are working to grow the economies they are located in and return money to their shareholders, that is, me. And it’s working! With no debt, no leverage and no taking a punt but with the clear view of growing our wealth slowly over a long period of time. No get rich quick schemes to see here!
During 2020 thousands of New Zealanders have started investing using one of the new, cheap and excellent investing platforms now available. And if you are one of them, welcome, but I want you to understand this: You are NOT the next great Warren Buffett and if you invest in only what you “know” and companies that you “believe in”, it means that you have just ignored thousands of other viable companies that you have never even heard of. And the chances are extremely high that you will lose money.
When you hear someone say “don’t invest money in the share market that you can’t afford to lose”, they are talking to YOU and they are talking about picking stocks and jumping in and out of the market and timing the market.
So, don’t try to pick stocks because you will most likely fail. Instead, diversify broadly and regularly invest a set amount of money over a long period of time into a couple of broad-based, low cost, passive funds and you can feel confident that if you check-in in 12 months, 5 years and ten years plus you will see a good return on your money. And in the meantime you have given your support to thousands of companies that provide a livelihood to thousands of New Zealanders, many of whom are renting due to choice or due to being unable to buy a house in this current market.
These companies provide the income that allows these tenants to pay rent to the amateur landlord who has staked their family’s entire financial future on one leveraged rental property on one street, in one suburb, in one town, in New Zealand. Sounds risky to me. “Eggs in one basket”, anyone?
Have you heard this quote:
“Never put all your money - or all of the bank's money - into an investment property if you can’t afford to lose it all”.
You won’t have, because I just made it up.
The sharemarket is consistently overlooked and overshadowed by the twisted tale that is the New Zealand housing market but I think to ignore it, you are missing out.
I’ll end with a passage from a book that I have cited before: The Little Book of Common Sense Investing - The Only Way to Guarantee Your Fair Share of Stock Market Returns
By John C. Bogle, a legend in the investing world.
“As you seek investment success, realize that we can never know what returns stocks and bonds will deliver in the years ahead, nor the future returns that might be achieved by alternatives to the index portfolio. But take heart. For all the inevitable uncertainty amid the eternally dense fog surrounding the world of investing, there remains much that we do know. Just consider these commonsense realities:
We know that we must start to invest at the earliest possible moment, and continue to put money away regularly from then on.
We know that investing entails risk. But we also know that not investing dooms us to financial failure.
We know the sources of returns in the stock and bond markets, and that’s the beginning of wisdom.
We know that the risk of selecting individual securities, as well as the risk of selecting both fund managers and investment styles, can be eliminated by the total diversification offered by the traditional index fund. Only market risk remains.
We know that costs matter, overpoweringly in the long run and we know that we must minimize them.
We know that taxes matter, and that they, too, must be minimized.
We know that neither beating the market nor successfully timing the market can be generalized without self-contradiction. What may work for the few cannot work for the many.
Finally, we know what we don’t know. We can never be certain how our world will look tomorrow, and we know far less about how it will look a decade hence. But with intelligent asset allocation and sensible investment choices, we can be prepared for the inevitable bumps along the road, and should glide right through them.
Our task remains: earning our fair share of whatever returns our business enterprises are generous enough to provide in the years to come. That, to me, is the definition of investment success.
The traditional index fund is the only investment that guarantees the achievement of that goal.”
Although I tried not to talk about the housing market, I couldn’t help but reference it throughout this whole blog post because the point is that we each need diversification, we each need to spread our risk. For my family our home is just that, our home, it’s not a money making enterprise and that’s what I want for every Kiwi. If they want to own their own home, then they should be able to do that and the sooner that the rest of us realise that there are investment opportunities outside of housing that let you grow your wealth and that also provide support to companies throughout New Zealand, thereby growing our economy and making all of us better off, not just a few, the better off I think we will collectively be.
