I have been a professional advisor in the stock market since 1982. For half of that time, I’ve been speaking to professional investors, to fund managers, and for the other half, I’ve been talking to self-managed super fund investors trying to look after their own money.
The difference between professionals and SMSF investors is that professionals have made all the mistakes already and don’t make them anymore. I’m going to discuss some common mistakes I see SMSF investors often make.
Playing it too safe
If you look at the average SMSF cash balance, it’s somewhere around 30%. Most fund managers are running at 5% and they might get to 20% in extreme circumstances. If you’ve got a nest egg and are expecting a 10% return, if you only invest half of it, you’ve got to make twice as much to get to your goals. That is cash, not investment. If you’re going to hit your goals, you can’t be too cautious.
Sticking with the same stocks
Something every stockbroker and financial advisor will tell you is when people have been looking after their own super, they turn up with the same portfolio. We call it “the portfolio”. It’s where an investor has gone to the top 50 stocks and crossed out any company that they don’t understand or can’t spell – which is why everybody still holds CSL, BHP and Rio. You end up holding all the banks, Telstra, Woolworths, Wesfarmers, Coles, Fortescue, Aristocrat Leisure, Transurban. It’s an obvious portfolio.
There’s nothing wrong with the top 20 stocks in Australia. But why bother with all the admin, all those different holdings, when you could just hold a market exposure that will give you the same return in one ETF, or indeed sitting in an industry super fund.
Chasing yield
The yield trap refers to investors who buy companies with large yields because they’re going to pay a special dividend or pay out more than they’re earning. We’ve got a saying: any stock that yields more than 10% doesn’t, because either the forecasts are wrong and they’re not going to pay it, or what usually happens if there’s one big dividend is the stock, on the day it goes ex-dividend, drops by more than it should because everybody’s selling – because everyone was holding it for the dividend. High yield does not mean it’s a good income stock.
Staying parochial
If you invest for income, you will corral your money into stocks with no growth options, which is why they’ve got big dividend payouts. The banks are fabulous stocks if you want income – sticking to their knitting, no growth options, paying the money back as dividends. Nothing wrong with that.
But if you're focusing on income in the accumulation phase, you're going to be focused on the low-growth stocks, which mean your nest egg is unlikely to grow. There are some fabulous income stocks – if you’re a wealthy retiree looking for income, nothing wrong with the major banks. But if you’re trying to grow your nest egg, income is not the place to be. Do not chase yield if you are looking to grow your money.
Domestic bias
The next mistake is investing only in Australia. In a world in which ETFs allow you to click a button and buy the S&P 500 or the Magnificent Seven in the same way that you can buy CBA or BHP, why aren’t you doing that? There is much more growth available outside of Australia. The big tech trade, the AI trade, networking, semiconductors – none of that is available in Australia. Australia is essentially a backwater market. With ETFs, you’ve got the option to invest anywhere in the world.
However, we cannot assume ETFs are all safe and similar. I was playing golf with someone recently and they said, “Oh, I think I’m going to change my approach, I’m going to invest in ETFs.” Which one? They’re not all the same. ETFs are just as complicated as shares. They also require research. Assuming all ETFs are safe because of the simple fact that they’re ETFs is wrong.
Long term investments and cyclicality
Another mistake is thinking you can be long-term with cyclical sectors. You probably could be long-term with some of the banks. They’re too big to fail, they’ve got fabulous businesses, they’ve got very little competition, they’re ingrained in the Australian psyche. But I heard somebody the other day saying, “I think BHP is a buy for the next two years.” Things change. Resources, which is a fabulous sector – and it’s fabulous that Australians are comfortable with resources, because there is an enormous amount of money to be made – but be aware, they are cyclical. These are not buy-and-hold stocks.
25% of our market is in the resources sector and people treat them as investments. They’re not. You can’t trade them beyond their commodity cycle. What’s the commodity cycle? Just ask anybody who’s ever bought a lithium stock. It is not a forever sector, but it’s a sector absolutely dripping in opportunity. If you can time the sector, time the stocks.
Paying too much attention to tips
You will find at dinner parties, amongst your friends, if it turns to the stock market, you will hear people tell you about stocks they made money in. This may appear as a tip. It will also probably be done with a knowing nod or a glance or in a whisper that adds absolutely zero credibility to a tip. Most tips are stocks other people are holding.
One of the golden rules of investing is buy it and then tell everybody else about it. If you get a tip, nod, or wave, go and have a look at the stock and make up your own mind – but never buy something because somebody told you to buy it. The likelihood is it’s already gone up, they’ve made money, they were just bragging and you think it’s something clever. Don’t buy stocks without doing a lot of research and taking responsibility for the tip yourself.
The trading trap
The next mistake is trading too much. This might sound silly. I know there are day traders out there who are probably successful, but day trading is an all-day job. If I made $100,000 a year day trading, I’d see it as a success. But the reality is I could have gone and had a job with a lot less stress and earned more money. It’s a lot of work. I have never seen anybody achieve long term success by being short-term. That doesn’t just apply to the stock market, it applies to life.
If you plan your future by looking at the end of your nose, you’ll never get to the horizon. If you find yourself short-term trading, it is akin to gambling. It may be fun, but will probably cost you and you're unlikely to get anywhere. Put it this way – if my spouse was looking after my super fund and they were turning up at dinner every night going, “Oh, had a win today,” I’d be thinking this person should not be running my money. A more sensible approach to investment doesn’t involve trading short-term.
The mistake that matters most for your retirement
The final mistake is having faith. We used to have a brother-in-law who got into broking. A mentor of his once said, “Don’t touch any buttons, come out for a coffee at 10am, I’ll tell you how to do broking.” What he told him was that when you first arrive in broking, find a company whose share price is less than a cent, that’s got half an idea, buy millions of shares and spend the rest of your career marketing it.
So he did this. He found a stock, one-sixth of a cent. Every event we went to, family function or Christmas gathering, he would be there talking about this stock. “Have you heard of so-and-so? Have you heard of so-and-so?” We used to call him the zombie, and it was always the same stock. And wow, it went from one-sixth of a cent to 20 cents. He had over a million dollars from putting in just a few grand, and it was fabulous. But one lesson – don’t develop faith, because he still held it when it went to zero.
Stay objective, watch the price – don’t believe the price. When it starts going down, think about doing something about it.
This is an adapted version of a transcipt from the Marcus Today YouTube channel. The full video can be found here.
Marcus Padley is the author of the daily stock market newsletter Marcus Today, see marcustoday.com.au. This content is general information only and does not consider your personal circumstances. It is not personal financial advice. Please consider whether it is appropriate for you or seek professional advice before making investment decisions.