Jess
Kia ora, I'm Jess from the communications and delivery team here at the FMA and you're joining me for another episode of Jess Learns to Invest season 2. Today we're going to be talking all about how to build a diversified portfolio and I'm very excited to welcome back Tom Hartman, the personal finance lead from the Retirement Commission and sorta.org.NZ. Welcome back, Tom. Good to have you back.
Tom Hartmann
Hey, it's great to be back with you here. Awesome.
Jess
So today we're going to be talking all about diversification. Could you kick off by just telling me what portfolio means? Because in my brain, I'm picturing something else than I think it means in the investing world. So for other Kiwis, what is a portfolio in investment?
Tom Hartmann
Yeah, I always like to think of it as a wallet to be honest, which is sort of that. that old way of calling a wallet, your portfolio with bills in it and what it holds. Basically, it's all your holdings in terms of the investments you have. But with investment, what's really key is the way that that's constructed because there's a lot. Not only is there a lot to it, but that actually drives what your experience in investing is going to be and what your results will be like on how that's built. The choices you make of what goes into that portfolio, what goes into your holdings, what goes into your wallet in that case?
Jess
Yeah, I love that. Yeah, because I was thinking like a portfolio, a literal, a book with different slides. And I guess it kind of is.
Tom Hartmann
Yeah, I mean, it's just a metaphor, right? And, but essentially, it's the collection of investments that you hold. So if you're invested in a single fund, within that fund, all the holdings of that fund will be your portfolio, essentially. Sure, you might have some investments outside that, but that will be your portfolio. And so it's really about looking at, so what's in that thing, what kind of investment mix does it have? That's what we're talking about today, I think.
Speaker 3
Yeah.
Jess
And what is diversification? Could you simply explain what it means and why is it a core principle, especially for long-term investing?
Tom Hartmann
This is one of the key things. And we were just talking about before, there is no investing without risk. And diversification is a strategy just to spread your risk as opposed to keeping it focused. And I mean, essentially what we're talking about is that old adage of don't put all your eggs in one basket. Now, There's a few things about our conversation that I wanted to just caveat. First of all, it would be really great if you had a professional fund manager having this conversation. And that's not possible. And then I wanted to also, I'm not a fund manager. I work on Sorted to help people understand what fund managers do. And also, I just wanted to shout out to the many mentors who have supported our work on Sorted, you know, people like Mary Holm and Morton Hawes. And so to anybody watching this, if they ever want to go deeper into these areas, I mean, these are really the experts who have pointed the way for the entire country in many ways on how to think about diversification. But essentially what we're talking about is very much don't put all your eggs in one basket. And so again, we're talking about the investment mix in your portfolio and what you're holding. And if it's all the same thing, or if it's just one company, you are basically, holding your entire fortune or your entire future is depending on a single company. Now, that's incredibly risky. It could do very, very well, but it could also go out of business entirely. So in order to avoid that, the idea is to spread your risk and you don't Luckily, these days, I mean, we're talking about fractional investing. You can have a slice of a slice of a slice of a piece of a company, and therefore you can be invested in many companies. And not just companies, I'm sure, you know, you've been going through the different kinds of investments and you can be in fixed interest and in bonds, not just shares. You know, people tend to think of shares, but there are a lot. And so it's really about spreading that and getting the right mix for you. But then within, if that you're going, a part of your portfolio is going to be shares to make sure that it's not just in one company, but actually that below that area that you're spreading it among different companies and different industries in different parts of the world. And some are going to do well and some are going to do poorly. We just don't know. And it's really healthy to say we don't know. We just don't know how it's going to turn out. And so diversification is a strategy in order to spread that risk and therefore to not have the wild swings and ups and downs that can come with. But let's just say that it's not always clear whether you're properly diversified or not. And that's a lot of the reason why we work with fund managers, why we work with professionals who are able to construct funds that should be able to protect us. Because we're not, so usually when we're talking about investing, we're not talking about striking it rich. We're talking about keeping wealth and growing wealth steadily over the long term. Okay. So in order to do that, a strategy like diversification will help. handle some of the risks and also make sure that the risk we're signing up for is actually what we end up taking on.
Jess
Because I was going to say, I feel like it would be more beginner investors that would invest in one thing and not diversify. But so it's sort of a good strategy. Even if you're just starting out and you're just starting with one investment, it's good to kind of research it and then diversify early, I suppose.
Tom Hartmann
Absolutely. And it's easy to do that with a managed fund. We've talked about managed funds before. That is one of the, definitely one of the benefits of starting with a fund because you're actually investing in a diversified way from dollar one.
Speaker 3
Yeah.
Tom Hartmann
From the very first dollar. If you had to do it yourself, it would be very expensive to diversify properly because like to buy a single share or it could cost hundreds and hundreds of dollars, and you might only have, if you're starting, for example, with $500 or something like that, and you weren't able to go into a fund, you probably could only put that in one company, and you wouldn't be diversified, and your fortunes would be chained to whether that company did well or not.
Jess
And I know earlier I said, diversification is good for long-term investing. What about short-term investing? I would imagine because it's sort of a strategy to help with risk, it would be a good thing even if you are, your goals are for short-term as well.
Tom Hartmann
Yes, absolutely. Again, we, especially in the short term, we don't know how a given company is going to do. And so in order to even out your opportunity, You want to be diversified across a number of them.
Jess
And how should someone think about the balance between growth assets like shares and bonds and things like that?
Tom Hartmann
Okay, so we need to distinguish a little bit between diversification and... asset allocation. And so what's called strategic asset allocation, which is really unsorted, we just call it your mix of investments. There we're talking about the mix of a different category. So let's just take the traditional balanced fund. They called it balanced because it used to be really between bonds and shares that they'd be 50-50. And that choice of that 50-50 is basically strategic. Really, what you're doing in terms of getting your investment mix between growth assets and income assets, and growth assets can be shares or commercial property, income assets can be fixed interest or even cash. What you're doing there is you are actually dialing up or down the risk you are taking on. when you invest, say in a fund or if you're looking at your entire portfolio. And so that's really what drives your investment experience of volatility along the way, the ups and downs that you'll experience and your long-term returns, really how much growth you're going to get out of investing in that way. So That's a little bit different than diversification, which is a level down, right? So first you got to figure out how much of your holdings are going to be shares. But then you've got to figure out in that part that's shares, let's go back to 50-50, in that 50%, how many different kinds of shares? And that's where the diversification really happens is picking a number of companies, not just, because if you just had one bond and one share, you wouldn't be diversified, but you would have a balanced portfolio. You would have a balanced allocation. You'd have a balanced investment mix. That's not what we're looking for, really, because that would not be really safe.
Jess
So it's sort of having multiple shares and yeah.
Tom Hartmann
So think of diversification. Think of risk really gets spread on that level below once you figure out in your portfolio, what you want to be holding, then to figure out, well, what companies are actually. So it would be on the company level in shares, would be on the bond level in...
Jess
Because I was going to say, I have obviously heard about diversification before, but not asset allocation actually. So, and they're different.
Tom Hartmann
Yeah, we just call it the investment mix of, usually we're talking about funds. For example, if you come on sort of smart investor platform, we've actually organized it all by the allocation in each fund. How much growth assets a given fund holds, how much income assets they hold. And that's the way we classify them. So you can look at, and when you're picking a fund, essentially what you're doing is you're picking the amount of risk that you're taking on.
Speaker 3
Yeah, right.
Tom Hartmann
So the more things, the more of the risky assets like growth, assets like shares and commercial property, there isn't a fund, the more risky it is. So you can dial up your risk up and down. So when you choose a growth fund, for example, it has more of those. When you choose a conservative fund, it has less of those.
Speaker 3
Yeah.
Tom Hartmann
And so the two are distinct. Sometimes it is a way of diversifying in a sense, not just having shares. I don't know if you've talked about on the podcast, single sector funds, which really only have one type of thing in them. So if you were just investing in a share fund, it's a single sector fund, and that is a very aggressive type of, if you wanted to dial your risk way up, you'd opt for something like that. But these ones with a mix in them are basically a way of tailoring something that's right for you, that's based on your goals, that's based on how much time you have until you need that money to use that money. You know, so there's a lot of things. And once that's set for a given fund, a fund manager will actually make sure that it stays within those parameters that it's set. So if you set a fund at 50-50, over time, some companies do well, some companies do less well, and it can deviate from 50-50. And so the fund manager's job is to rebalance and to bring it back in line with that asset allocation, with that investment mix.
Jess
And I know lots of Kiwis are in KiwiSaver. So how does KiwiSaver fit into your overall portfolio?
Tom Hartmann
Yeah, so essentially, KiwiSaver can be our biggest investment for many of us outside of, for example, the family home or something like that. And so that'll make up the lion's share of where our investments are. We're investing for the long term. So all of this applies. Essentially, what happened was Investing, which used to be reserved for, only a small portion of people suddenly became democratized and lots of us got in. And probably the reason why we're sitting here is all of a sudden people find themselves in KiwiSaver and being an investor. I hope they realize that this is not just saving. This is actually your money is being put into investments that go up and down in value. And so, and so all of this is going to apply. Question is, your KiwiSaver fund diversified? are you holding enough different things so that if one company or one industry or one part of the world goes into a downturn, how affected will you be and how balanced out will you be by others that do really well, that continue to grow, and over time, that diversification. So all of this applies, everything we're talking about. So every Kiwi Saver fund is going to have an investment mix, an asset allocation. And you want to make sure that investment mix is tailor-made for what you need it to be. So depending on, your stage in life, really it depends on how soon you'll need that money, and KiwiSaver how soon you'll need it back, whether you're using it for a first home or for retirement, and whether you're comfortable with the amounts of ups and downs that you can experience with it. The key thing is not to have someone jump ship when things get rough.
Speaker 3
Yeah.
Tom Hartmann
You know, it's like a roller coaster. You don't want to hop off halfway on it. Like you make the call, I'm getting on this roller coaster and I'm going to see it through.
Jess
Yeah. So it's like when markets are volatile, that's what you're here as well is to just wait, let it ride.
Tom Hartmann
It out. Everyday investors are getting much better at that all the time. What I'm seeing. And so that's a really good development, right? Because we're seeing more in that COVID time that people saw those steep drops and suddenly we're jumping out of it. And the moment that you sell up all your investments, when things are down, it's the moment that you really crystallize your losses. You cement them in. You can't step away from them.
Jess
Yeah, and it is hard because it's, you know, it's your money and that is quite stressful to see it drop. So I can see why people do that. But yeah, it's a good reminder to...
Tom Hartmann
Yeah, it is understandable. And it's possibly the reason why we're talking about this today is because setting an investment mix, setting an asset allocation is one way to overcome our humanity, our natural fear that comes in when you see, you know, a balance tipping off. And then that diversification is a way to actually moderate how big those peaks and troughs are that you experience?
Jess
And I feel like with KiwiSaver, especially myself, lots of people kind of set it up and they kind of set it and forget it. How would you go about checking to make sure your KiwiSaver is diversified?
Tom Hartmann
It's one of the reasons why we built Smart Investor is in order to do precisely that. Because every six months, the fund managers, they report, everything, the portfolio holdings of a given fund. And you're able to, yeah, you're able to basically to go to the page that's all about the fund that you're in, and you're able to drill down, and you're able to see, for example, whether you're invested in Apple, Nvidia, you know, or any of the other millions of companies around the world, you're able to actually see, and what percentage of your holdings is Google, for example, Alphabet. Yeah. And so you're able to see on whether you're diversified or not. Now, one of the difficulties of this conversation is there's no way to give a tick that this is diversified enough because there's not really that consensus. I really wanted to hit this point as well. This idea that more is better, it may be, just buy the entire world market, and you can do that through an index. But... Others think that you really can go overboard and you really only need 30 companies, for example. And that's way above my pay grade, but that's what the fund managers are paid to do for a given fund. And they state what they're going to do and then they do it and their supervisors in place to make sure they do with the money what they say they're going to do.
Jess
And if someone's KiwiSaver is already well diversified, how would they incorporate that in with other investments.
Tom Hartmann
So I think like a financial, it'd be fair to say that a financial advisor would take your entire holdings of your entire life into account when they're making a call. So for example, if outside of KiwiSaver, you might be very local here and invested in New Zealand companies. So you might, for example, tilt a KiwiSaver fund more internationally. So you could actually balance that out. So to your question, like your portfolio is basically everything you hold. And that can be even if you own investment property, for example, which is very, or if you own a business here, which is very tied to a given industry, then actually it makes a lot of sense that something like KiwiSaver would be more invested abroad.
Jess
Yes, yep. Because that was going to be one of my questions as well is We do tend to invest locally, which is great, but how would someone get confident enough, I guess, to kind of go into that global market?
Tom Hartmann
I think a lot of it's not necessarily about confidence. Confidence can help in terms of investing, but a lot of it is determining whether that investment mix is right for you. And then what's very important to people, especially here in New Zealand, is the ethics of our investing. And those companies that are in a given basket of shares, for example, that are part of a fund, how ethical that is. And you can put a lens on it that way. You can put it on. But the important thing is really that it's in different locations and different industries and different. And that's what really, it's really about safety here and about limiting the risk. There's always going to be risk, but you're in control of how much risk you're taking on.
Speaker 3
Yeah.
Tom Hartmann
Thanks to this.
Jess
There's a great point about industries as well. It's really important not to put everything into one industry. If you're a fan of a particular industry, it's just kind of spread it across.
Tom Hartmann
Well, I mean, it's easy to see right now as we're recording this. You know, we've got a war going on in Iran. the straight block, the tanker, obviously the oil industry is being hit directly and then that has flown effects to other industries. And so if people were invested heavily there, obviously they're maybe sitting on the edge of their seat, but we're also watching the other industries as well. So it does matter where we're invested. And the more we The more we engage with where our money is flowing to, the better. the more we understand what's in our queues. The thing with Kivi Saver, though, is we really need a lot of people to just get started, because otherwise you sort of, get paralyzed if you need to know everything about. And so it's really about the first step is making sure that the investment mix of the fund you're in is appropriate for you, that doesn't keep you up at night. And a professional can help with that. Yes, absolutely. Like we're always, a lot of our work on sort of just to prepare people for a really rich conversation with a financial advisor. Like the two go together and they're meant to complement each other. We're not trying to replace that role of advice. It's gold. If you get good advice, it's always going to be helpful. But it needs to be informed advice too, to really have a good conversation with an advisor.
Jess
And what are some common mistakes you see people make when it comes to diversifying their investments?
Tom Hartmann
One thing I wanted to just raise that I've seen in the past is that these days, for example, in KiwiSaver or outside of KiwiSaver with managed funds, you have the ability to, for example, pick a little bit in a conservative fund, put some portion of your money into a conservative fund, put some portion of your money into a growth fund. And people kind of head to their bets a little bit, or they kind of try to do a little bit of 1 and try to balance them all out. Well, guess what? A lot of times what you're doing is you're just creating a balanced fund, the investment mix that you're actually coming out with. So you might as well be in a balanced fund, one that a front manager has already created that does that. The other mistake with diversification is to think that just because you are in both, for example, in bonds and shares, that you're diversified. You have to go that level down to see what shares are being held. And if there's just two, shares in that bucket, you obviously are not. Or if it's concentrated too much, for example, in the tech sector, there's a lot of worries these days that because those tech companies that have been scaling up in AI have been gobbling up that share of people's portfolios, that people are too much into there and then might not be safe anymore. might not be diversified anymore. So it's a great, healthy questions to ask. Yeah, Healthy questions to ask.
Jess
Because I'm guessing it would be quite easy to do that as well.
Tom Hartmann
We've seen, incredible growth in that area. So what ends up happening is that those companies do really well and it ends up that they become a bigger part of your portfolio than you intended or that you started with. And that happens over time. And so it's a great question to ask, like, does this really match me? Like, does this really match where I need to go? Maybe it does, maybe it doesn't.
Jess
Comes back to that goal as well, let you see. it initially when you started, right?
Tom Hartmann
Yeah, and we've built a couple tools on Sorted that really help people with this. One is called, for KiwiSaver, it's called the KiwiSaver Fund Finder. And this is just to answer a few questions. to really see what type of KiwiSaver fund is appropriate to you. And I think we've talked about that before. And then outside of that, we have our investor profiler, which really is a tool that helps with manage funds and you're investing beyond KiwiSaver to really to understand, you know, what type of investor you are and what type of funds you might be looking for a given goal. based on how soon you need the money, your capacity to invest, and your comfort level with those ups and downs that can happen in the market.
Jess
What is rebalancing, and then how often should investors consider it? Could you explain what it is? is first, because I have not heard this term before.
Tom Hartmann
Yeah, So rebalancing is one of the most important things a fund manager will do. Most of us don't do it ourselves, but the easiest example of it I can give is, let's go back to that balanced fund, traditional one, 50-50, right? 50, 50 bonds, 50 shares. What ends up happening over time is that the the actual allocation, the actual mix ends up shifting over time, especially as some shares do better, some shares do worse, some bonds become more valuable, some bonds become less valuable. And rebalancing is, it usually happens about once a year, what a fund manager will do, will basically bring the fund back in line with the initial mix and make sure it stays aligned to that. So over time, for example, you might end up holding 60% shares and only 40% bonds. And so it can shift over time. And so what ends up happening is that the fund manager will actually sell part of those shares that have been doing well and then start to buy more shares that maybe are lower in price. And so this is exactly, and it's almost automated, like it's automated system to keep this fund on track within parameters that have been set from the beginning. So this way, there are so many advantages to this system. And it's another way of overcoming our humanity of our, because naturally what ends up happening is you're invested in a winner, for example, and the natural thing is to stay in it and stay in it and becomes a bigger part of your portfolio, a bigger part of your portfolio. And what ends up happening is that you're more exposed to a potential downturn. It's because you've it's sort of inflated to the point way beyond what you've ever intended in the 1st place. So without rebalancing, you can't bring things back in line. And so it's this great system where you're selling things as they become more valuable and you're buying things that are less valuable that can grow in the future. So I think I'm I can't stress enough how important this is, because it's not just setting a course, setting the amount of risk you're taking on, but it's actually keeping in line with that choice that is what rebalancing ends up doing for us. And so naturally, we'd try to hold on to those things that are going gangbusters, and we'd end up running into more risk without wanting to. And so what you want to do, I mean, the classic thing in investing is you buy low, sell high. Rebalancing is doing that automatically.
Speaker 3
Right.
Tom Hartmann
And so that's one of the things that's built into the system to really take the emotions out of it because we're like, oh, it's doing so well. I'm going to, and you're still benefiting from it doing so well, but you're actually also selling high and actually staying in line with what you intended to do. Because if you wouldn't, probably your goals haven't changed, your time horizon hasn't changed, your tolerance for ups and downs hasn't changed. And so you want to stay the course. Rebalancing helps us do that. And I think if we had, you know, a fund manager here that they'd be able to really go into, what it takes, but it's a lot of trading and it's a lot of resetting of a given fund. It happens probably on, most often on an annual basis.
Jess
And you said investors don't have to do anything, so it's sort of, it's automated. Oh, great.
Tom Hartmann
Well, it's part of the reasons why we pay a fund manager to do it in that case. But if you're investing, if you're, investing on a platform, doing it yourself, and you think about your whole portfolio and say you're in your favorite company, as that company grows, it can become a larger part of your portfolio than you ever intended.
Jess
Right.
Tom Hartmann
Yeah. And that, and you want to make sure that that's okay, that it's still in line with your goals because the, The tendency is to hold on to that for as long as it, but the stock market, the share market tends to rise like a. an escalator, but it falls like an elevator, it tends to do this. I don't know if you've noticed in terms of graphs and all that. And so people's natural tendencies is to ride that as long as that line goes up. But it's notoriously difficult to time when those falls are going to happen. You know, there's all sorts of things that can influence that, whether it's within the company or whether it's geopolitical like we're seeing today. So And predicting that is really, really difficult. So the way of getting beyond that is setting an investment mix that's right for you and then rebalancing in order to stay in line with that. If your goals change, and then you might do something different. But as soon as you confirm that you're in the right type of fund or in your right type of investments, you want to make sure that you're I'm staying the course through that.
Jess
And do you have any tips on how people can make sure that their portfolio is on track? Would you say an annual check-in or anything like that to help check how your portfolio is going?
Tom Hartmann
It's an interesting balance, isn't it? Because on one hand, you want some of the set and forget.
Speaker 3
Yeah.
Tom Hartmann
And this is why we're always kind of concerned about people seeing their balances on their phones, next to their other accounts. Now, one of the things we try to remind people is that when you see your balance in a fund, you're not looking at what you have. You're looking at what your investments are worth, what those units of shares, for example, are worth at a given time. It's sort of like segments of an orange, right? So like you have certain segments, and if you think about when you go to the grocery, oranges cost a bit more, cost a bit less. Those segments that you're holding are worth a bit more or a bit less, depending on what the market in orange is, has it been done, what time of the year and all that sort of thing. To your question, portfolios are incredibly diverse. It gets a lot easier when you're in a single fund, like say you're just thinking about KiwiSavers. So that allows us to keep it real simple. Like as you're investing in saying in a shares ease or what's that money for? You know, and that's kind of what we were trying to help people with on sorted with, say, the investor profiler. And that's a way of answering your question. So this money is for that. In X year's time, I'm going to need that money to use it for this, that, and the other thing, a wedding, around the world trip. Whatever your goal is, a house deposit, you're going to need it during that time. Is it on track? Is that mix of investments going to get me there? That's the question. And is that, but really with an investment mix in terms of, it's really whether, is that investment mix the same? Or has it shifted? And that's the role of rebalancing.
Jess
And it is so easy these days to just, you've got most of the apps on your phone, right, as well, and you can just go in and check how they're going.
Tom Hartmann
Yeah, and Just to finish off that other point, really, when you're looking at that balance, it's not what you have, it's what those investments are worth at a given time that's going to change over time. But that's actually, I really like what Francis Cook says, that's not a bug. That's not something wrong with the system. The fact that volatility goes up and down, that's actually a feature. That's actually one of the reasons why we're able to get growth out of the system is we're actually investing into a system that goes up and down in value, up and down in value, and we're gonna, you know, invest in those companies that are going to do well and we're able to grow over time.
Jess
And how do fees impact long-term investing? And yeah, what should people look for when they're comparing funds and ETFs?
Tom Hartmann
It's really important to keep the fees reasonable. What happens, there's a few different things about financial products that are really important to know. One of them, you'll see that all the fees are these tiny percentage points. If you ever talk to finance people, they talk in basis points, which is 100th of a percentage point, or bips. And so they don't seem very material. But if you look into it, you'll realize that fees which are collected behind the scenes. Like we don't get an invoice, we don't pay a bill or anything like that, actually can amount to 10s of thousands of dollars of difference, especially over many years. Like if you're investing in KiwiSaver and a managed fund for... So fees are really important that they're reasonable, that you keep an eye on them, that you understand what you're paying. And one of the reasons why we built the Q Saver Fund Funder is actually to estimate how much you would pay in fees from now until your retirement age, you know, so over decades. And you can see like that it can be differences of over $100,000 when you get to fees. So the other thing is on most products, you'd think you'd get more when you pay more, right? So you go into, say, a bottle shop or something like that, you're buying a bottle of wine, nice bottle of wine, you think that you're going to get a bottle, a better bottle of wine when you pay a bit more, right? So a $20 or a $40 bottle of wine should now...
Jess
I think the quality would be better.
Tom Hartmann
Yeah, and it's about quality, but it's also about our perception of quality too. The weird thing about wine is research has shown that if you pay more for a bottle of wine, it'll actually taste better for you. But that's But with financial products, what ends up happening is actually those fees are taken out of the returns. So instead of those returns coming to you, they will go to your fund manager. And so they have to be reasonable because your fund manager is performing a service for you and that rebalancing that we were talking about is one of the most important. and not losing your money, for example, or not. But it turns out with fees that the more you pay, actually it affects the product itself. So imagine if you paid more for a car and it went slower. That's effectively what's happening with fund fees, with financial fees connected to investing. So it's a little bit different than a normal product.
Speaker 3
Yeah.
Tom Hartmann
Because the amount that you pay means that it's sort of like you can actually think of it like a credit card or something like that. The higher the interest rate, the worse. So the more you pay for it, you're not getting something better. You're getting something worse. You're getting a product that actually is not that good for you financially as it could be. So you want fees to be as low as practical, but there's sort of this cost-benefit analysis. If you're going to pay more, you want to think that the quality of the fund management is actually better.
Jess
Yeah. And while we're kind of talking about, obviously in this episode, all about your portfolio and diversification, I feel like Emergency savings and cash should come into that as well, considering how much money you want leftover for your emergency savings and your cash. Because I keep hearing that that's really important to make sure you've got a rainy day fund or whatever they call it these days.
Tom Hartmann
Yeah, There's lots of names for it. Safety nets, buffers. And unsorted, we're working on an app right now that actually to help people build emergency savings. And actually fund managers actually do this sometimes in their fund where they hold cash. a certain amount of cash. And you can see it in your investment mix. And sometimes, but that's not about emergency savings. To your point, like outside of all this investing, you really want to have a buffer, a safety net, and an emergency savings so that if things go pear-shaped for you in your financial life, that you don't have to raid your long-term investments. That's why it's like almost doubly tragic when people do a hardship withdrawal. I mean, and it can be appropriate because people can be in a really difficult situation, but not only are they selling investments, and maybe it could be a bad time to sell them, but they are stepping away from all that future growth that could have been. if that money had stayed invested there. So there's a few things. And so an emergency fund is the antidote to that. Like having enough set aside for when things go wrong, it'll differ for people's situations, is really important to our investing. Like the two need to go in tandem. And it's so important that usually when people say, I don't know where to start in my financial life, we will start them there. That is the fundamental thing.
Jess
And could you talk me through what a simple, well-diversified portfolio could look like for someone starting out?
Tom Hartmann
Well, people are in very different situations that's my hesitation here. It's really important that I don't recommend. So what I can recommend, though, is to find the right type of fund. And that's exactly where we've tried to support people the most. Because once you find that, gives you your investment mix. That gives you, and again, that's based on your comfort level with ups and downs that you think you have, your goals of how soon you might use the money. And then Outside of KiwiSaver, it's also your capacity to invest. How's your job going? How's your, you know, if somebody feeling a little bit insecure about their career at the moment, depending on what's happening, you know, that'll affect their investing as well. That'll affect the type of fund. So there is not one-size-fits-all. But once you have that type of fund, that investment mix, Then you can start to look at funds of that type, or you can start to make investments in line with that investment mix that you're going for. And you can make sure that you're not going into a limited range of companies, a limited range of industries, a limited range of locations around the world, and that you're not too focused in your investment. that you're taking on more risk than you think you are. So ideally, we want the right type of fund, the right mix for someone in line with their preferences and their goals, and one that's diversified, holding a range of shares, bonds, that are not focused in a way that their investments are riskier than what they want to take on. people, when they put their money at risk, they're looking for the growth, but there is always, they're looking for those returns, but there's always the risk that comes with that.
Speaker 3
Yeah.
Tom Hartmann
And you can think about those returns as you getting paid for taking on that risk, but the returns are not a sure thing. Like anyone who starts to indicate what future performance is gonna look like is probably guessing. is probably trying to make an educated guess or a thing, but they really don't know. And there's a heck of a lot of people out there on the net who are trying to make the call to get it right so that they can have bragging rights if they get it right. Yeah, right. You know what I'm saying? I called it. Yeah, You know, but that means it's sort of a scattershot approach, right? A shotgun approach that they throw lots of predictions out there and whoever gets it right gets to up here, appear smart. We don't know. Yeah, that's the thing, right?
Jess
Nobody knows. Even the smartest people don't know.
Tom Hartmann
Yeah, that's right. That's exactly right. So how do we operate in an environment where there's lots of unknowns? We can diversify. We can make sure we have the right investment mix. We can make sure that our investing is in line with our preferences and our goals. And we can double check that every once in a while, and it will help not to look too often if those ups and downs really get us a little queasy.
Jess
So it's sort of that balance of, yeah, being across different industries and then different investment products as well, just to kind of, again, like you say, mitigate that risk of markets dropping.
Tom Hartmann
And like, A focus on a given area might be appropriate for some investors, depending on all the other things that they're holding too, right? You just wouldn't want your entire fortune, your entire savings, your life savings to be tied to a single industry or to a single company or to a latest trend.
Jess
Yeah, totally.
Tom Hartmann
Right.
Jess
Because trends change so quickly.
Tom Hartmann
They do. They do.
Jess
So property is quite a big thing, as we know, in New Zealand. Should people consider their property as part of their investing portfolio, do you think?
Tom Hartmann
When I talk to financial advisors, they tend to take a holistic approach. They tend to take into account everything that a person holds. So I think the answer should be yes. And if you think about what you're holding here locally, and that can be an investment property, or maybe it's a local business or something like that, should influence your other investing choices in terms of, and so someone's KiwiSaver in a case like that should probably be able to balance that out and maybe should be more oriented abroad. overseas shares, for example, in order to build. But the short answer is yes. When I talk to advisors on how they deal with clients, they're definitely taking a holistic view.
Jess
Awesome. And is it possible that you can be over-diversified?
Tom Hartmann
I'm sure it is. But in terms of knowing when you're over-diversified, that's where it becomes a little bit tricky. What you're doing when you're spreading the risk like that is you're trying to flatten out those wild ups and downs that there can be. So you're trading away a little bit of the returns. Like, for example, in a Kiwi Saver Fund, you would not see a return of 100%, usually sustained over long periods of time. But some companies can grow like that.
Speaker 3
Yeah.
Tom Hartmann
But, and so what you're doing is when you're diversifying, you're trying to limit these steep falls that you can experience, but you're trading away some of the peaks as well. So it is possible that you could be over diversified, but I wouldn't be able to pinpoint. It's easier to see when you're not diversified enough. You know, if you're only in a couple, if you're really only into a single industry or a single company, a single, that's easier to say. But I think it's a really good question to ask. Like, have I diversified too much? Have I diversified too little? The answer will really depend on a given investor, their situation, their goals, what they're trying to achieve, all this sort of thing. I mean, you got to think also, it depends on what other resources you have, what other What are assets you own, what position you're in, your career? there's so many moving parts here. But I think that's a really healthy question. Like, have I diversified too much or am I diversified too little? Have I spread risk enough? Have I spread it too much? It definitely is possible. But how to answer that question will differ for every investor.
Jess
Yeah. And to wrap up the episode, is there anything that you'd like listeners to take away?
Tom Hartmann
Somebody like Andrew Carnegie is famous for saying, no, put all your eggs in one basket, just watch that basket really closely, you know, sort of thing. But that, for most of us, is not going to work. You know, that's really like... We want to be investing between the flags, if we're on a beach or something like that. We want to be swimming in a way that really can grow for the long term and not just, try to have a one-hit wonder or something like that. We really need to. And, spreading that risk around and not have it too focused and not have ourselves really hanging out there when things go wrong, not leave us out there on a limb when things are really shaking. It's really important. This is a really fundamental thing is to spread your risk. That old adage, don't put all your eggs in one basket, have a bunch of baskets, but make sure that, you know, those eggs are safe and look at which eggs you are actually holding is the key thing here.
Speaker 3
Yeah.
Jess
Thank you so much for your time today, and if people want to find out more about diversification, obviously Sorted has some great tools on their website. Where can they go on the Sorted website to find out more?
Tom Hartmann
Yeah, so on Sorted.org.nz, really the two... Key things that I'd recommend for people to check out are in the KiwiSaver space. It's the KiwiSaver Fund Finder, which really is a good first place when you're thinking about types of funds and fees. And then our investor profiler, which is the tool for really to understand more of what kind of investor you are and what kind of investment mix, what kind of allocation might be typical for an Investor like you, and then it leads into Smart Investor, which is where you can find all the funds on offer, KiwiSaver and non-KiwiSaver managed funds. of funds of that type. So we're really helping you to go to the bucket to sort through. And you could sort through by investment mix, you could sort through by fees, and you can sort through by past performance over the past five years. You don't really want to make a choice based on that. But if you see anything that's really underperforming its peers, it could be a sign that management hasn't gone so well. And so that can help inform your choice. So it's really the QB Saver Fund Finder, the Investor Profiler, and Sorted Smart Investor.
Jess
They're great tools and really user-friendly as well.
Tom Hartmann
Thanks. Thanks so much. Yeah, we really hope they work for people for where they're at and to make really good decisions. And since this has been mostly about diversification, Smart Investor is the place where you're able to unpack these funds that holds, you know, some of them can hold like 1000 different securities inside them, and so really to unpack what exactly we're investing in, what companies we're actually investing in.
Jess
Awesome. Thanks so much, Tom. It was great having you on again.
Tom Hartmann
Thank you. It's great to be with you here.
Jess
And thank you so much for listening. If you'd like to find out more, head to our website at www.fma.govt.nz and I'll see you next time.
Disclaimer
The content of this podcast is of a general nature and is not financial advice. The thoughts and opinions of guest speakers are not those of the FMA. The FMA recommends that our audience seek advice and respect to investing from a regulated financial advisor. The FMA does not accept any responsibility for loss that any person may suffer from following it.
