12. Never pay interest … except investments4. Grow your pie Cash flow from labourCash flow from investments
13. 3 Discussion After graduation, you will start to notice a lot more discussion about “investment tips” in the workplace, at social events and in the media. What are some things to consider when determining whether these are “wise” investment tips?
14. 4 Ten Keys to InvestmentTip 1: Invest in what you understand Warren Buffett (famous U.S. investor) only invests in companies that he thoroughly understands. What is there to understand? How does the company generate profit? What is the past financial performance? What is the expected future performance? What is the company’s competitive advantage and how is that sustainable? What is the quality of management?
15. 5 Ten Keys to InvestmentTip 2: Go with mainstream assets Stay away from exotic investments Eg. Films, Agricultural Schemes, Warrants Stick to simple assets Cash (eg. Savings account) Fixed interest (eg. Term deposit, Debentures, Bonds) Residential property (eg. Unit to rent out) Commercial property (eg. Shop or office space to rent out) Shares (eg. Telstra) The easiest way to diversify across all of these is by investing through a managed fund (more later). Income assets (fixed interest) provide good cashflow Growth assets (shares) go up in price and provide cashflow
16. 6 Ten Keys to InvestmentTip 3: Understand that return = risk More correct is “expected return” = risk If you have a diversified portfolio of investments then … Risk does not mean “the risk of losing all your money”. It means the uncertainty of future returns on an investment This is how financial markets work: Expected return based on long-term averages (eg 10% Telstra). But, you don’t know what will happen over the next year. Good year might be 10% + 30% = 40% return. Bad year might be 10% - 30% = -20% return. Expected return is a reward for the risk that you take. However, actual return will be different from expected return! Conclusion – no free rides! 20% “expected return” is NOT 20% guaranteed return!!
17. 7 Ten Keys to InvestmentTip 4: Watch out for promotional gimmicks Investment should stand on its own merit. Ignore promotional “freebies” Free DVDs, gift of $15, free airfare to Queensland to look at investment properties. Promotional freebies are a poor compensation for bad returns for 10 years! Don’t invest based on glossy promotional fliers and nice pictures. Stay away from investments that have high pressure sales (eg. Time share accommodation).
18. 8 Ten Keys to InvestmentTip 5: Diversify Diversify between home, superannuation and investments Home is a good “geared investment” and is nice to live in! Superannuation is best way to save for retirement Investment portfolio (eg. Managed funds) is good in case the government changes rules with super or if you need money before age 60 Diversify between asset categories Split money between fixed interest, shares and property. Split money within each category. Invest in a minimum of ten shares in different sectors. Cheapest and easiest way to diversify is using managed funds (but watch out for high entry fees and ongoing fees) Main benefit of diversification Investing all savings on one share is gambling! Diversification brings same or higher expected return but much lower risk!
19. 9 Ten Keys to InvestmentTip 6: Don’t try to time the market The best performing sector each year changes between: Australian fixed interest, International fixed interest Australian shares, International shares Australian property, International property Best performing sector often receives 10%-40% return. … but are often the worst performing sector the next year! Always expect average long-term return of investment category and NOT what it received last year. Many people invest based on last year’s returns This is called “induction” and is a logical fallacy! Research demonstrates that the average investor times the share-market poorly. The counterparty in the buy/sell is usually a financial institution. They have more expertise, better analysis and data than you!
20. 10 Ten Keys to InvestmentTip 7: Try dollar cost averaging It can be very depressing to invest $100,000 to then find that markets drop 10% the following month. For big investments, invest $50,000 straight away then $10,000 per month for 5 months. If markets drop then subsequent investment will be made at cheaper prices. If market increases then you loose out slightly on overall returns (but not too much). By starting a savings plan of $500 per month into a managed fund, you end up smoothing returns over the long term compared with investing 100% upfront and making no more investments.
21. 11 Ten Keys to InvestmentTip 8: Invest in growth assets for long term Growth assets (shares and property): Have higher expected return (2-3% per year) than fixed interest investments over 10 years Higher uncertainty of those returns (risk) in any individual year. If don’t need access to your savings for 5+years then invest in growth assets. Ignore short-term fluctuations and ride the rollercoaster to achieve long-term average Don’t try to time the market!
22. 12 Ten Keys to InvestmentTip 9: Seek advise … but beware! Seek advise about investments if you need it. However, most advisers will not want to see you if you are younger than 40 or earn less than $150,000 per year because: Their time is expensive They won’t get enough commission from your investment You can’t afford fee for service ($3,000 upfront) If an adviser is willing to see you then they are probably a salesperson and will sell you a high commission product and never want to see you again.
23. 13 Ten Keys to InvestmentTip 10: Take action Most people don’t do anything about investments or make a hasty decision into a bad investment! Take action now following these tips. Start small to gain experience Use managed funds Set up a $100 per month savings plan
24. Stop and read Now read: Chapter 12 Ten keys to successful investing 14
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