The case for investing
- Michael Haupt
- Dec 18, 2021
- 4 min read
Updated: Feb 7, 2022
At some point in your life, you’re going to get sick of spending extra hours at work to earn more money.
Those extra hours at work, while profitable, are starting to eat into your lifestyle, taking time away from friends and family and the things you love.
You’ve realised that you can’t do all the heavy lifting yourself, solely by trading your time for money. And you’re right. There are only so many hours in the day that you can work. At some point, you need to have your money working for you.
The good news is that if you’ve been following this blog so far, at some stage, you’re going to be in a situation where your savings are starting to accumulate.
And at the same time, you’re probably going to be wondering if there is a way to get a better return on your investment than simply having your savings in cash.
The good news is, there is.
The bad news is, there’s a catch.
And the catch is, to move beyond simply saving cash as an investment, you’re going to have to take more risk. And as it is with investing, the higher the return, the higher the risk.
What this generally means is that, in order to achieve better returns, both in terms of yield and capital growth, there is a higher risk of loss of capital - the risk that your asset will go down in value. From a high level perspective, the levels of risk vs return are set out below.
So if the risk grows, why invest?
Because investing is the only way to have your money grow over the long-term.
In order to accelerate your wealth creation, it’s far more beneficial to have your assets also earning you more money.
All those graphs I showed you about your wealth adding up to and exceeding $1million, only happens if you invest throughout your life.
Investing is the true way to take advantage of the power of compounding.
When you invest, you are effectively allowing your money to grow without your involvement anymore.
When you choose not to invest, you are allowing your money to be gradually eroded by inflation, a losing strategy because living expenses are increasing every year.
In the following posts, we’re going to discuss the following:
The core investments - cash, managed funds, shares and index funds
Why fees are a major factor in determining your investment returns
Tips for succeeding as an investor
Whether you should be using a financial advisor
Whether you should invest or pay off your home first
Before we get started though, a few general rules to follow are:
If you have credit card debt, you’re not ready to start investing. Credit card debt is simply a symptom of your personal finances being out of whack. You need to remedy the underlying issues before progressing further. The good news is that if you have credit card debt, there is almost no better return on investment than paying off your credit card, providing a return in excess of 20% with no risk.
If you have a personal loan with an interest rate of greater than 4%, you should focus on knocking this off the list before investing.
If you have a highly geared home loan, try to pay this down more. Many financial planners recommend that you pay off 50% of your home loan before investing elsewhere.
If your employer matches additional super contributions for every extra dollar you contribute, this would be a great place to start investing. Not only does it minimise your tax, you get a free matching contribution that helps grow your super, which will generally be taxed at a lower rate than income earned outside of super. It’s going to be hard to get a better investment than that. Just make sure you are within the limits for super contributions.
Make sure you have at least 3 months of savings before starting to invest. Because markets are volatile, you don’t want to put yourself in a situation where you are forced to sell off your investments, especially if the market is currently low. As it is with Murphy’s Law, what can go wrong will go wrong. Forced sales also trigger selling costs and Capital Gains Tax, all factors that dilute your financial wealth. Having savings aside is even more important if you are investing in property because property can be so illiquid.
Be prepared to invest for 5-7 years, and only invest money you can afford to go without for the next 5-7 years. This gives your investments time to go through the motions of volatility and provide capital growth.
Consider the structure in which you will invest - your own name, your spouse’s name, in a trust, in a company or in your superfund.
With so many options available, how should the average Australian invest?
This is where my opinion differs from the typical finance blogger. I’m not too fussed if you invest in property, shares, business or index funds. But I would ask that you have a solid understanding of the asset class before you start investing in it.
I also strongly believe in diversification, as already, I’ve seen way too many people be financially ruined by being too concentrated in a specific investment class. In my lifetime, I hope to invest across the following investment classes - property, shares, index funds and business.
Personally, I don’t believe there is only one way to invest or a perfect investment.
Each of us have unique circumstances and goals - these factors are extremely important in determining your investments. You should tailor your investment strategy to your goals, risk appetite and understanding of the asset classes.
All investments have their advantages and disadvantages. I just ask that you do your homework before you start investing, and be aware of inherent characteristics of the different investment classes.
Life will present you with opportunities to invest. Your job is to recognise which opportunities are worthwhile, and to act.
Welcome to the investment series - let’s get started.
The Investment Series
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