You’ve taken Step 1 on the road to financial independence and put in place a savings plan, and next up is investments. Good work!
Next you’ll need to make some choices about what to do with those precious dollars.
Been watching the markets amid election pre-selection in the States? Or hearing how the Coronavirus not-yet-but-possibly-may-become-pandemic is making waves?
Both can make investing today a terrifying prospect.
Beyond the immediate news, we are in an era of:
- Unprecedented low interest rates,
- Historically high prices in shares.
- Even volatile property values.
It’s hard to pick an investment with any degree of certainty about future performance.
We get a lot of questions on this topic, especially:
Where should I put my money given the current economy?
Here’s some possibilities, but before you read on:
This is general information. We don’t give financial advice, and we’re not licensed to do so. Each of you has special circumstances that affect the choices you make. Get advice if you need it.
OK, on with the show. In no particular order:
1. Pay off loans
If you have a high rate loan – e.g. a credit card or a car loan – pay this off before you start investing. The interest you pay is guaranteed. Investment returns are not.
A few extra dollars into superannuation can be useful. Especially for young people, as there’s plenty of time for compounding to take effect. If you’re wondering if it works for you, consider the pros and cons in this article.
You can salary sacrifice – particularly effective for those on high wages. You can put in money after tax, which means the money is not locked up till you reach retirement age.
If you have a low income there are some incentives too. The government may make an extra contribution. Check out the ATO calculator to see if you qualify.
There’s a new scheme where money you put into superannuation can be released for a home purchase. This article is a good starting point for that process.
Check the details with your superannuation fund or accountant.
If you are closer to retirement age, a ‘transition to retirement’ plan is worth considering. It’s a tax effective way to pop some extra money away without sacrificing your lifestyle.
3. Real estate
There is plenty of good value out there, although it may not be where you live and work.
Yes, it’s particularly daunting to look at Sydney or Melbourne prices. Sydneysiders and Melburnians may think it will never be an option. There are other Australian capital cities with stable prices, e.g. Brisbane. Some are even currently depressed, e.g. Perth.
Of course, there are many smaller centres with good rental returns. Research is the key. If you are thinking of a rental property, look at local industry, facilities like schools, council zoning, transport, climate… the list goes on!
Property is best as a long-term investment and will generally require debt. Although interest rates are very low now, they may go up. You still need to be able to make repayments. A negatively geared rental property can have tax benefits. It also means there is more risk for the owner if interest rates rise or there are problems with tenants.
Families or friends buying property together can work. This reduces risk and you’ll need less capital. The downside can be differing opinions on how to manage and when to sell the property.
You might also think about buying somewhere to live that has spare rooms you could rent out.
Property might also be commercial, like a shop, or an office or warehouse or factory, even a parking spot.
4. Mortgage offset account
If you do have a mortgage, an offset account could reduce your interest.
You’ll find an explainer herebut the quick version is: You put any money into this account and the balance ‘offsets’ an equivalent amount on the loan account. Your provider charges interest on the lesser amount.
It’s effective if your income arrives in larger but less frequent payments, like contractor income paid after finishing a job. The money is then drawn out in smaller amounts to cover weekly expenses. The bulk of it will stay in the offset longer.
We love shares! They are:
- Readily available.
- Easy to buy and sell
- Low cost to enter/exit.
And you can get started with a tiny amount of capital.
If you qualify and want to, you can even borrow money to buy shares, though this increases your risk.
With shares, you can invest outside Australia. You canchoose the sector you feel happy to have your money funding. If you want ‘ethical’ investment, there are many options.
There are numerous platforms (brokerage firms and the ASX) offering virtual accounts. This lets you play and learn before you put any of those hard-earned dollars at risk.
The ASX website has a plethora of free education. Its Sharemarket Game is a good place to start.
(PS. You can join our league if you want to! ID 28988, password buffettordalio).
Of course, once you own a share, its value may go down. Market fluctuations are out of your control. They’re often nothing to do with the actual share you have chosen. Tensions between countries, wars and pandemics, as well as a host of other factors, can send the prices tumbling. It is hard to watch this happening and not be panicked into selling at a loss.
Remember: dropping value does not always mean reduced dividends. Your income might remain the same even if the portfolio is worth less.
6. Banks, Bonds and Notes
There are various types of bank deposit accounts. Most have been impacted by the reductions in interest rates. They offer low risk.
(Though there are concerns about bank bail-in provisions being enacted in Australia.)
Your cash is on hand to meet emergency costs.
This asset is unlikely to decrease in value unless your bank charges fees.
As interest rates hover around inflation, there is a possibility that those dollars will buy you less next year than they will this year.
Bonds are available from the Government and from Companies. They can offer reliable income at better than bank rates with relatively low risk.
For the investor who wants something that requires almost no time to manage, they’re worth considering.
Notes and hybrid securities are financial products issued by banks. Companies issue them too, toraise capital for business ventures. They can be traded. The prices may go up or down depending on performance. Income is not a guaranteed amount. The features and risks may be difficult to understand for an inexperienced investor. If you are keen to know more go to MoneySmart.
7. Exchange Traded Funds (ETFs)
There’s a rapidly growing selection of ETFs on the ASX. Instead of buying a share in a single company on the stock exchange, you effectively buy a unit in a fund. The fund owns shares in several companies and is administered by a fund manager.
The fund may specialise in a sector like real estate, energy or technology. It may have a selection of shares in something like the ASX Top 200. There are options that give international exposure. Some only have responsible investments.
These are an excellent way to spread your money over a few different sectors and companies. You can leave the decision-making mostly up to someone else – after you choose the fund.
It is a liquid investment where you can add extra or withdraw funds easily by buying or selling the ETF holding.
These funds charge fees, so look for low-fee options. Also bear in mind that past performance is no guarantee of future performance.
8. Managed funds
Once again, the selection of these funds is exploding. Especially with all the money flowing into superannuation. Super funds are looking for a place to give members some diversity and better risk management.
Like ETFs, there are managed funds in all sorts of categories. They’re offering things like capital security, fixed interest and real assets. Instead of purchasing a unit on the ASX, you open an account with the fund with the amount you want to invest. There are management fees. Check the documentation for these and other costs like exit fees.
Having your money in a fund can reduce your time commitment. Buying and selling shares privately requires ongoing effort and good record keeping. A fund will manage the trading for you and will generally provide a Tax Statement for you come tax time.
Gold and other precious metals or gems are attractive to look at. Investors also enjoy the feeling of security of an actual physical item you can see and touch. You’ll need somewhere safe to keep these items.
Investing in them provides something of a hedge, as their value often rises when other assets are falling. Trading in these commodities is largely about timing, i.e. picking when to buy and sell. There is always a risk that values will fall. Do some study before jumping in.
Cryptocurrencies are still relatively new. They use blockchain technology which will certainly be impacting on our financial system soon (https://www.moneyschool.org.au/investing/bitcoin-blockchain-and-banking/).
There are several thousand of these available. The best known with the largest market share are Bitcoin and Ethereum. In 2017/18, a surge in prices created a lot of new millionaires. Then there was a large scale pull back, wiping off those newly acquired gains.
Values are on the increase again, but with plenty of volatility. There is no certainty attached to this as an investment – it’s more of a game. (Though, there is little certainty in most investments!)
We know several folks who’ve turn their hobbies into profitable ventures. Artwork, antique furniture and specialised cars are some examples of things you can buy that might be worth more moolah down the track. You might even get pleasure using these while they appreciate.
It goes without saying that this is a field where you do need specific expertise – but we’ve said it anyway, just in case 🙂
This is about investing in yourself. If you take a course that makes you more employable, or more valuable to an employer, then it should get you a bigger pay packet. Sometimes this kind of expenditure can also be a tax deduction.
Acquiring extra knowledge also satisfies our need for personal growth so this one is a win-win.
The common wisdom (which we support) is to spread your investments. At least buy shares in more than one sector, or consider whether two cheaper properties would work instead of a more expensive one. Ideally invest your money in several types of asset.
Diversity over several kinds of investment can reduce your risk. If you find yourself needing to sell something, you can choose the asset that is up in value instead of selling something at a loss.
How about you?
What have you been thinking about investing in given current economic conditions?
Are you fighting an impulse to sell? Selling now with the intent to buy back in later? Switching tack entirely?
Let us know in the comments 🙂
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Fran White is the co-founder and director of Money School. She helps parents raise financially savvy kids and helps adults get on top of their finances. Connect with her on LinkedIn and follow the Money School Facebook page to learn more.