In February last year, I warned that the Reserve Bank would have to “turn on a dime” and cut interest rates because a global recession was coming. I tipped we “just might dodge a technical recession” and I did my best to tell financial planning clients, readers, listeners and viewers that it was not wise to run to cash when the stock market had slumped around 50 per cent!
At the time, I had the highly regarded AFR commentator David Bassanese on the program and we were talking about exchange traded funds (ETF), which are a cheap way to get access to buying into market index-style products. (More on that another time.)
Choosing a strategy
Clearly, Bob wanted a 'set and forget' investment that would grow over time, so that as his grandchildren grew up he could help out with their education. Referring the question to David for a second opinion — I do that on my show — he replied that he wasn’t a long-term, set and forget investor. He’s an active investor who gambles that he gets it right more times than he gets it wrong and with his background he probably could. However, most of us are like Bob and want a reliable investment strategy.
For sums larger than $26,000, such as super nest egg, a trustworthy financial planner makes a lot of sense for many people. If not, you have to become your own adviser and that will take time and plenty of homework.
The most important story
But that’s why Bob emailed me — he just wants a reliable strategy. And that’s why this is the most important story — I can give Bob what I believe should work, but I could be wrong because there are a lot of strange variables that can knock out sensible, reliable and historicallysound investment styles.
Unlike David, I do like to invest long-term in my self-managed super fund and I drive my investments based on important lessons I have learnt.
First, shares do outperform bonds generally, but bonds operated by an experienced bond manager can outperform shares.
Second, 50 per cent of the return from shares historically have come from dividends, and so I generally buy shares that pay reasonable dividends.
Third, I will buy companies such as BHP-Billiton that do not pay great dividends, but can deliver great capital gain, especially with its current link to China’s modernization, which can’t happen without steel.
Fourth, like Warren Buffett, I buy great Australian brand names. I like to punt on the success of Australian industry.
Fifth, the average fund manager does not beat indexes such as the All Ords or the S&P/ASX 200 and that’s why index funds are a good option.
Sixth, while average fund managers don’t beat the index, above-average ones can and do, and that’s where homework or a great adviser can help build your wealth.
Seventh, while for small amounts such as $26,000 you could throw it all into an index fund, which will give you some diversified shares (assets), for larger amounts you should have a mix of assets — shares, bonds, property and cash. Always be wary of just buying one or a few shares as even great companies can have a shocker.
Eighth, I like 20 shares in my portfolio so I only have 5 per cent exposure to any one company, but some people I respect think 10 to 15 can be okay. However, you have to make sure your ten companies are rippers when you play short.
Ninth, if you play long only, you have to expect that your money will go up and then go down, but history shows that, as Don Stammer always says, the magic of compound interest will deliver good returns over time. Great shares do return around 10 to 12 per cent per annum over 10- to 20-year periods but there can be bad periods where the returns go up and down. If you average 12 per cent then your money should double every six years. That does not mean it happens every six years, but on average it will. You see, when the market rose at 20 per cent or more before the end of 2007 brought the credit crunch and market meltdown, investment money was doubling every three years! (You work out doubling rates by dividing the percentage return in to 72. So, if you have six per cent return, it takes 12 years to double your money. Don’t ask me why, it just does!)
Tenth, property is a great asset. To buy a house you love and renovate it, delivering yourself a capital gain if you sell it that you don’t pay tax on, is a great opportunity. Be careful, however, of over-capitalisation. Also, using equity in your home to buy a negatively-geared property or, better still, a positively geared property are great ideas. An investment property with a tax strategy can be a great way to build wealth pretty safely. You can even think about a cautious use of this borrowing technique with tax deductions to buy great quality shares, but go into this with your eyes wide open and knowing what you could lose.
And finally, given what I said in the last step, great advisors can help you select your mix of investment assets and think about you with an objective set of eyes. They could even ask the likes of Bob if it would be a good idea for him to invest the money inside a self-managed super fund to reduce the potential tax he might have to pay outside of super.
Surrounded by experts
I believe we all can do an enormous amount of DIY investment work ourselves, but history has taught me in trying to grow my business, my media career, in trying to get fit, in trying to lose weight and in sorting out my tax affairs that experts, who know more than me and who care about me succeeding, always cost less than what they have given me.
These 11 steps constitute the most important lessons I could share about investing for your future.
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