Welcome back on board the magic train, which showed how you could build a huge next egg for your children using regular small investments. Previously we delved into the magic of compounding; today we will answer two of your most asked questions: “How can I obtain a safe 9 per cent on my money?” and, “I would like to invest in shares but don’t know where to start”.
But first, think about the question: the word “safe” is misleading. Every investment has a downside as well as an upside – the trick is to understand both.
Retail investors have a range of investment options besides cash. Photo:
You may think putting your money in the bank is a very “safe” investment, and there is no doubt it is the perfect investment in the short term. But over the long term it is a very risky investment, because the small amount of interest you make will be eroded by taxation and inflation and there is no chance of capital gain.
If you opt for property you leave yourself open to the risk of repairs, maintenance, vacancies and capital loss.
Most people are not skilled at picking individual stocks. Photo: Gabriele Charotte GLC
So a better question would be, “How can I obtain a reasonably reliable 9 per cent a year over the long-term on my money?” For example, in my own self-managed super fund I have investments in property syndicates that are providing a running yield of around 9 per cent a year. I like these because they provide diversity, and allow me to invest in high-quality small commercial shopping centres, which I could never do on my own. The disadvantage is that my money is tied up until the managers decide to sell a centre, as I am effectively a part-owner of a building.
I also have a holding in the Investors Mutual Equity Income Fund – a conservative managed fund that is designed to pay a monthly income. The return over the last five years has averaged 10.1 per cent a year, consisting of 8.4 per cent income and 1.7 per cent growth. But, because the fund invests mainly in Australian shares, there are years when the returns are low and years when they are high. A major benefit is the fund pays a high degree of franking, which enhances the after-tax yield.
Further diversification is obtained by keeping about 40 per cent of my super fund in international managed funds. They may have copped a pounding in the last week, but over the last decade they have averaged better than 12 per cent a year.
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So, I do believe it is possible to obtain a reliable 8-9 per cent a year over the long term if you are prepared to accept the volatility of shares. But this begs the question of how you choose them.
Now I accept the fact that there are readers out there, and you know who you are, who have a great track record in picking stocks. Unfortunately, I am not one of those, and I believe that few people are. Anybody who follows the Shares Race game in this newspaper every Sunday will have noticed that the leader keeps changing, and often Dartboard grabs one of the leading places.
One option is to consult a financial adviser. A good advisor will be able to cast their eye over your entire financial situation and recommend strategies to speed up your journey to wealth. They will also recommend quality managed funds, which often outperform the index.
If you are just starting off, or your affairs are simple, you could start by investing in Acorns, who will do the asset selection for you. Their main fund has averaged 13.99 per cent a year since inception two years ago.
Or simply invest in an index fund. The one I use has the ASX code STW, is run by State Street, and tracks the leading 200 stocks in the ASX. The management costs are trifling at just 0.19 per cent a year, and it is currently paying a franked income of about 4.5 per cent a year. Since inception in August of 2001 it has returned an average of 7.89 per cent a year after fees.
This is an exchange-traded fund (ETF), which means it is listed on the Australian Securities Exchange so you can buy and sell in small amounts at short notice whenever you wish. Just keep in mind that this is an index tracker: if the market falls 2 per cent tomorrow your portfolio will fall with it.
I do hope that the above information can lead you to achieve solid long-term returns. But remember, the aim of this column is to educate you, so it should be just a starting point for you to do your own research about how to get yourself on the right track. Next week we will talk about tax, inflation and investment structures.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: email@example.com
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