As the saying goes: 'Learn from the mistakes of others. You can never live long enough to make them all yourself.'
For my mind, the best lessons come from listening to other investors and advisers’ experiences and what they should have done, so here are my top five mistakes investors make around end of financial year.
1. My first principal of investing is that: investments follow structure; structure follows strategy; strategy follows goals and objectives – in the absence of the first three, any decision regarding the last is really meaningless.
So, mistake number one: making investment decisions without relevance or context to:
a. Goals and objectives: if you don’t know where you’re going, you’ll probably end up somewhere else.
b. Strategy: What’s the use of running if you’re not on the right road?
c. Structure: Ownership efficacy, tax, protection and estate.
2. Mistake number two: Not seeking advice early enough – June is a great time of year for planning for the next year, not the current one. It really is too late to make any investment decisions for the current financial year, unless of course it’s part of your original strategy. End of financial year investment decisions are usually centred around my mistake number three.
3. Mistake number three: Making an investment decision purely based on tax. Most readers' immediate thoughts will be of Eucalyptus, Almond, Ostrich or Table Grape schemes. I am yet to meet a single investor in any of these arrangements, schemes or projects who wouldn’t have been better off just paying the tax in the first instance.
There are, however, subtler ‘tax inspired’ transactions that should be avoided if the only benefit is tax, transactions like:
a. Unnecessary gearing – I recall the story of an investor who was so desperate for an end of year tax deduction that he double geared and pre-paid 12 months of interest into a capital protected equity product then spent the next seven years paying interest on a $500,000 loan secured against a ‘cash-locked’ investment that no longer generated income – the year was 2008.
b. Holding a booming investment too long in order to avoid paying higher tax – Poseidon comes to mind. You are better off paying tax at 47 per cent on a gain than carrying forward a loss.
If the only motivator to any investment decision is tax, then it is worth seeking advice, a second opinion or checking in with your strategy first. Investment decisions should be made on the merit of the investment, not the tax benefit of.
4. Mistake number four: Making investment decisions based on fear or greed. No matter how experienced we are as investors, eventually bias, overconfidence and emotion cloud and misguide our judgement – don’t ignore the psychology of investing, there are some great books around on this topic.
5. Mistake number five: Trading too much or too regularly. I like the saying: 'Money is like soap, the more you touch it the smaller it gets.' With investing, patience is most certainly a virtue, use any end of financial year impulse to ‘review’ rather than ‘trade’ your portfolio, gain a deeper understanding of the investments you hold and review their suitability in the portfolio when measured against goals and strategy.
Adam Goldstien, director, Skeggs Goldstien