Economist Shane Oliver’s advice for investors: follow these simple rules for optimum results

AMP chief economist and head of investment strategy, Dr Shane Oliver has amassed vast knowledge over four decades in the financial field, yet his key tips for average investors centre around keeping things very simple. Create a long-term plan and stick to it. Invest in a mix of high-quality assets including bonds, shares and property. Don’t follow the crowd. Use the magic of compounding by reinvesting your returns. Don’t invest in products or companies you don’t understand. And maintain an optimistic view.

“We have a knack for overcomplicating investing,” Dr Oliver says.

Buying quality assets at good prices (determined by looking for low price-to-earnings ratios and high dividend yields with shares) and holding for the long term is a simple approach that works, Dr Oliver says.

“The cheaper you buy an asset the higher its return potential. Flowing from this it follows that yesterday’s winners are often tomorrow’s losers – as they get overvalued and over-loved.”

Diversifying investments is crucial. Lower-risk assets like cash and bonds give investors comfort but lower returns. So, growth assets have to be in the mix. He also notes that compounding interest “is key to growing wealth”. Dr Oliver says a dollar invested in Australian cash in 1900, with interest earnings reinvested, would be worth about $259 today. If it was invested in shares, with dividends reinvested, it would be worth $879,921.

“Yes, there were lots of rough periods along the way for shares, but the impact of compounding returns on wealth at a higher long-term return is huge over long periods. The same applies to other growth-related assets such as property.”

Fear stops many investors from even getting started, and fear can drive panic in financial markets when economic crises inevitably occur. “Much has happened over the last 40 years with each new crisis invariably labelled ‘unparalleled’ and a ‘defining event’ …” Dr Oliver says.

He’s witnessed the 1987 crash, the recession Australia “had to have” in the early 1990s; the tech wreck in 2000; the GFC in 2007/2008; and the pandemic. Despite such events, ASX shares have delivered positive returns in roughly eight out of 10 years since 1900.

“So, getting too hung up worrying about the two or three years in 10 that the market will fall risks missing out on the seven or eight years when it rises.”

When it comes to investor psychology, Dr Oliver puts it plainly: people can get irrational. This causes many stocks to rise well beyond what they are fundamentally worth. Dr Oliver says investors tend to look for evidence that confirms their views (‘confirmation bias’), become overconfident when influenced by ‘the crowd’, and have a lower tolerance for losses than gains.

“While fundamentals may be at the core of cyclical swings in markets, they are often magnified by investor psychology if enough people suffer from the same irrational biases at the same time,” he says. “This ‘safety in numbers’ approach is often doomed to failure. The problem is that when everyone is bullish and has bought into an asset there is no one left to buy but lots of people who can sell on bad news.”

Dr Oliver says investors need to know themselves and manage any psychological weaknesses.

“It’s also about knowing how you would react if your investment just dropped 20% in value,” he says. “If your reaction were to be to want to get out, then you will either have to find a way to avoid that as you would just be selling low and locking in a loss or if you can’t then you may have to consider an investment strategy offering greater stability over time and accept lower potential returns.”