Tag Archives | diversification

Eggs in Baskets

Egg BasketEggs in Baskets

Time and again, despite knowing that putting all your eggs in one basket is a bad idea, investors lose money by chasing high returns or taking a gamble on a supposed ‘sure bet’. In the current environment of low returns, it is very tempting to look for opportunities to increase returns. This particularly applies to retirees who are struggling to make ends meet having seen their interest income fall to about one third of what it was prior to the Global Financial Crisis.

Investment ‘baskets’ operate at two levels. At the highest level is the split between different investment types (asset classes), such as cash, fixed interest investments, property and shares. At the next level, there are specific investments, such as individual bonds, properties or shares which fill each of the baskets. Investors who select a number of specific investments in just one asset class, such as fixed interest, are in effect putting all their eggs in one basket. The classic example of this is investors who spread their money across several finance companies in the belief that this would reduce their investment risk.

There is a key difference between investment and speculation. A speculator is prepared to take high risks for the possibility of extraordinary returns while an investor seeks a balance between risk and return and preservation or growth of capital in the long term. These are exactly what diversification provides.

It is difficult to predict which asset classes will provide the best returns in the short term. Chasing short term returns by trying to pick winners almost invariably leads to a poor outcome. A safer approach is to spread funds into different baskets knowing that some will perform better than others in the short term but there will be balance between risk and return in the long term.

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Five Good Reasons to Invest Offshore

Invest Offshore

Global influences in investment markets have become more powerful over the last decade, due to the effects of technology, globalization of businesses and economic union between countries. The Global Financial Crisis is a powerful example of how interconnected world investment markets are now. This is not necessarily something to be afraid of and in fact there are many opportunities as well as threats. There are five good reasons why it makes sense to invest offshore right now:

  1. New Zealand is a very small part of the global economy and investing in one, very tiny market makes little sense when you take a global view. Diversification is a good reason to invest offshore. The impacts of natural disasters and adverse economic events can be lessened by spreading investments far and wide across the globe.
  2. In the medium term, it is known that global growth will be driven by emerging economies such as China and India and not by the developed world. Leave these countries out of your investment portfolio and you will miss out on opportunities for good returns.
  3. The New Zealand economic outlook is uncertain following the Christchurch earthquake. In the short term at least, the earthquake is likely to have a negative impact. Economic growth will be dependent on exports and business investment.
  4. Our exchange rate is at a historic high point in relation to currencies of our major trading partners. Investors placing funds offshore now will not only get more for their money, but they will stand to gain again when the exchange rate drops as it inevitably will.
  5. It is easy to invest offshore through managed funds, using the expertise of fund managers who understand the markets they invest in.

Overall, investing offshore opens up opportunities for increased returns and reduced risk.

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