Get rid of all the rubbish

Most investors would benefit from a garage sale, writes Ross Greenwood

Ross Greenwood

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INVESTMENT IS PRETTY SIMPLE, ISN’T it? All you have to do is beat inflation, after you have paid all fees and taxes. That way your money is keeping up in real terms, going forward even.

And inflation these days is just 2%. So money in the bank at 4% will deliver the return with no risk. Cut your tax bill by investing through your super fund ... and long-term you keep more of the money for yourself.

Increase your rate of return by taking some calculated risks or purchasing sustainable, quality investments when others don’t want them, and you can do it easy.

Easy!

So why do so many people screw it up so monumentally? Why do people get themselves in such a tangle they find investing almost impossible?

Let’s try to break it down for you. If you are aged 40-plus, chances are that your super and investments look something like your garage ... or your spare bedroom, if you like.

If you are an ordered person, your portfolio will be accounted for and your garage will be sorted. Screws in one container; nails in another. If you are especially organised you might even have painted shapes of your tools on the wall, so you can hang them up. In your portfolio you will have plastic manila folders with records for each separate investment and you will have computer programs set up showing what you own, where it is and how much income it will pay.

Or you could be like the rest of us.

Most people accumulate investments the way we gather “stuff” in our garage. Occasionally we will venture in to clean something out. But mostly we just keep buying and buying, without strategy and without clear guidelines as to when we will sell.

The truth is that more people have to be ruthless with their loss-making investments. If you made a mistake, sell and consider that the price of your investment education. But like a store owner who holds on to stock (in the hope of selling it at full price), it is folly to hold on to poor investments in the vague hope of selling when you get a decent price.

This really struck me in the past month seeing the plight of Billabong shareholders. Some of them, including the founder Gordon Merchant, have held the shares since they were $14 each. They started to fall – seriously – from early 2011 when they slipped from $10 to $5 to $3 and, more recently, well below $1. Along the way, Merchant and various incarnations of the Billabong board rejected ever decreasing takeover offers.

Like many investors, they remembered the company the way it was ... not the way it is.

At some point clearing out those old investments – in a garage sale – is necessary to generate cash and to avoid holding on to things (old bikes, or chests of drawers) in the vague hope they might be worth something, some day to someone.

One of the very best ways of accomplishing this cleansing – like the garage sale – is to say to yourself, “If I were to begin my portfolio all over again, how would I like it to look?”. It is equally true for people who have companies, trusts and all manner of personal finance mechanisms set up.

Make your life straightforward and you will rapidly discover you are seeing your accountant or financial planner less (with fewer fees) and you will have cash on hand to take advantage of the bargains when you see them.

As well, you will know how to structure those investments so you can buy and sell with more ease.

Simplicity of structure is the key to taking advantage of opportunity.

Ross Greenwood is Channel 9’s finance editor and Radio 2GB’s Money News host.

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