. The Mom & Pop investors believed they were diversified when in fact all their money was “diversified” within one asset class (term deposit) and within one sector (finance companies). And we know what happened then.
The area of finance & economics is always up to debate. I only have my opinion and it should not be taken as advice, though I do like to poke a few ideas around here and there.
I'm well aware about diversification to lower risks and there's a lack of that when it comes to the NZ investor. Predominantly 1st choice for investment in NZ has been into real estate and it will remain that way for a very long time. Why this obsession? Quite simply because the average NZ resident understands the real estate model (renovations, rental, all things to add value and generate cash flow etc.). But when it comes to picking stocks, well I like to say, "That's a horse of a different colour". It's not like we're trying to sell cars and certainly the financial advisor doesn't have the same approach as a car salesman. The comparison is that a buyer has some idea of a car they like, and the salesman goes to meet the type of car they want (size, it's utility, economy on fuel, etc.). But when you talk finance, terms like EPS, dividend yields, asset liquidity, taxation, in addition to market threats is too mind boggling for the novice investor. By rights, a person investing into the stock market needs a background of economics, finance, & accounting. But a person in the market to buy a new car, well then that's just a matter of preference (most importantly, all relevant information is easily available). In finance terms, the NZ sharemarket is FAR from being 'efficient' or holding a 'strong form' of efficiency. NZ is not a Cypress and i'll get on to that later.
Buffet proclaims that for anyone interested in investing, it is best to stick with investments that they know and familiar with. It just so happens in NZ, people know rental properties and land, which IMO, is not a bad thing. I would rate investment into a rental properties attracts far less risk than to buy into any shares on the NZX. Why? Quite simply the $ they pay for a fixer upper rental property is under their control, they see the $ going in and can physically do the repairs, etc. When it comes to buying shares, all they see is $ going towards a balance sheet and the full discretionary powers are left to the board of directors on that company. When directors make a wrong decision, they get sent off with a golden handshake and the shareholders lose. When a person fixes up a house in the wrong location for sale, and it proved to be a big loss, well the person has 2 options, i) sell for a loss and blame themselves, or ii) wait long enough until inflation creeps up that the house values eventually appreciates. These options (or controls) do not exist in the sharemarket model.
Bank term deposits (although not the safest) would be the least riskiest. Why? Because it involves no work added to get that % return. If you take all your available investments in NZ, you need to factor the added risk for that extra % return. This is why I never bother to look at NZ junk (corporate) bonds because their prescribed rates aren't much more than the bank deposit rates. The same goes with private venture capitalists a la Hanover Finance, S.Cant. Finance, when they were offering 9 or 10% on cash deposits, the major banks at the time were offering around 7 or 8%. What investors didn't realise is what level of risk were they exposed to just to get that extra 1 or 2% return? No one questioned that and certainly it wasn't mentioned about on all those TV advertisements they've made. Now, those bail-outs have become at the cost of NZ tax payers. NZ Mighty River Power could fall into a similar fate where (like Solid Energy : a NZ state own company) any loss in profit will come at the cost of all NZ tax payers.
I also don't find the NZ banking system having risks that Cypress has. In order for bank in NZ to fall in a similar fate, it would mean that the Australian economy would have to collapse in the same way. It may be a different issue if all the major banks in NZ were wholly NZ owned, but instead, by having Australian backed banks in NZ, we've reduced the risk of such an event.
The more relevant question in the area of finance is, what level of diversification is suitable to the NZ investor? Do Kiwis need to have investments into share markets? Does the measuring stick for diversification apply for one living in Canada vs one living in NZ vs one living in China or Zimbabwe? It may be that bank term deposits and rental properties is all that is required in NZ.