Cracking the "eggs in a basket" theory
Date: 2010-01-25
A conversation with friends over dinner led to the subject of whether one should take advantage of the current property market and buy a couple of lucrative properties or whether one should diversify into other investment vehicles. The answer lies in what type of investor you are. Are you an active or a passive investor?
The passive investor
· They have the available funds, but not the time to play an active role. They prefer leaving the management of their portfolios to the “experts” or their trusted financial advisor. They opt for investments with low maintenance.
· While they may initially take the time to study their next investment, they don’t want to have to acquire too much additional knowledge in order to successfully part with their money.
· They seek the opinion and approval of others and therefore are more likely to buy when everybody is buying and sell when everybody is selling.
· They are careful with their money, have a high need for security and a low risk threshold.
The Active Investor
· They thrive on taking calculated risks.
· They like to be in control of their investments, acquire an enormous amount of information and often focus too much energy and time on technicalities.
· They study their markets and assets well and are sensitive to bullish or bearish fluctuations.
· Their profit margins tend to be higher, irrespective of what the markets are doing.
Passive investors should diversify their investment portfolios in order to defuse the effects of market fluctuations, while the active investor will identify with Warren Buffet’s statement: “Diversification is only required when investors do not understand what they are doing.”
While diversification often is a safer haven, it does come with some potential pitfalls. Often passive investors take uncalculated risks when an “opportunity” comes recommended and the cash outlay is relatively small. Furthermore, because they are not actively monitoring the markets they often only notice deterioration in their portfolio when it’s too late to react constructively.
Many a fortune has been made and continues to be made in the property market. However, a study of these successful property investors will show that they vigilantly study the market, they surround themselves with a panel of experts and adopt the attitude of life-long learning.
Deciding where to invest ones hard-earned cash isn’t an easy decision and definitely not one that should be made around the dinner table or a “braai”, where every opinion is given as fact and every advice as if from an expert.
Tess Rodrigues
Managing Director