OPINION: About the worst thing that can happen to investors is that they get themselves in a position where they are forced to sell.
Forced sales mean that control over the investment has been lost and, just about always, the sale is at a time when the markets are down.
This is exactly the time when you do not want to sell.
Rather, it is a time when you need to be to be picking up some bargains.
But the forced seller must sell – whatever is left of the investment needs to be converted to cash.
Forced sales are common for two main reasons: first, many inexperienced investors get rattled out of the market because of a major market fall.
Some GFC-like event collapses the market and concern turns to panic as market commentary screams of a dire situation, amplified by the media.
At such times, even a casual observer would think that the world is about to end in a puff of smoke.
And so, people sell – right into the bottom of the market. At the precise point where the smart money is scoring bargains on a distressed market, some feel so much heat that they just have to get out of the kitchen.
Second, people who have borrowed for investments sell because they cannot meet the loan repayments.
This is most common for property investors, but a few share investors also have debt and end up not being able to meet their obligations.
Forced sales in this category are almost always because the investor has borrowed too much, and the investment depends on everything working perfectly.
However, things may not work perfectly: a tenant leaves and cannot be replaced, an increase in interest rates or the loss of a job when salary is being used to meet interest repayments, mean a forced sale.
That sale is almost always at a poor time – a time of rising interest rates, redundancies and reducing income.
There is a simple message: make sure that your investments carry a level of risk that is right for you and watch your gearing levels.
Remember that everything will not go right all of the time.
Those who get these things wrong end up almost giving away what may be very good investments – greatly to the benefit of those who have thought ahead and can buy in tough times.
In effect, forced sales are bad for the seller but the winner is the person on the other side of the trade – the buyer.
There are plenty of people who just wait until they can find a distressed seller. And they know they will have plenty of victims every time there is a market downturn.
Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.