Investment portfolios generate income and capital growth. If these are reinvested you
gain more income and growth on that income and growth and your total wealth will
therefore increase at an astonishingly fast rate.
eg. $1,000 invested in shares in 50 years ago would now be worth around
$150,000 if it had earned no more than the return of the All Ordinaries Index with
returns being reinvested. Taking into account inflation, the original $1,000 would
be worth around $32,000 meaning that about $118,000 would have been generated
from compounding interest and capital growth.
The moral of the story is that the sooner you start investing and reinvesting returns
the faster your wealth will grow.
Rule 6 Legitimately
reduce your tax
There are many questionable tax minimisation schemes around which should be
avoided, but by investing in legitimate, tax effective assets you can reduce your
overall tax bill and increase your wealth. Be cautious of getting involved in anything
which looks a little too clever or makes promises which seem too good, but every
investor can legitimately consider the following:-
- Superannuation -
- Gearing and negative gearing -
- Tax paid / effective investments such as imputation trusts or insurance bonds.
Rule 7
Plan
When you invest make sure you know why you're investing and what you time horizon is.
Some things you may like to consider doing are:
- Planning a budget including an amount set aside for regular savings.
- Deciding whether you should focus on short term savings or long term investment as
this will help to determine you investment risk profile.
- Prioritising your goals and working out what's really important to you. Do you really
need to make that next large purchase or should you pay off you mortgage more quickly ?
- Getting rid of debt, especially the bankcard sooner rather than later.
- Choosing an investment risk profile that you feel comfortable with, because the
prospect of receiving high returns is of little use if the risk involved gives you
trouble sleeping at night.
Other strategies
you may wish to consider
Instalment
Gearing
Given the uncertainty associated with
International and Australian Share markets, it is wise to keep some of your
assets in liquid form so as to take advantage of any corrections. Don’t
mistake this advice for staying out of the market, on the contrary, the logical
strategy is to have some of your portfolio invested and another portion ready to
invest should the right conditions prevail. In betting parlance it is a classic
"each way bet".
An excellent
way of taking this each way bet is by utilising Instalment Gearing:
For a minimum investment of $250 per
month you can borrow $500 each month.
You have flexibility in that you can
stop and start your contributions whenever you like once you reach borrowings of
$20,000.
Instalment gearing enables you to take
advantage of the concept of dollar cost averaging, whereby disciplined, regular
monthly contributions in an ever volatile share market should yield strong
results over the medium to long term. As
the market falls your regular contributions will buy more and more units, as it
rises again you will buy less, however the units purchased previously will be
worth more.
Not only is the system fool proof in
that you cannot buy too much when the market is too high and you purchase more
units whilst the market is falling, but it is also tax effective (the interest
on your borrowings is tax deductible).
Dollar
cost averaging
Take
an "each way bet" invest some of your funds in case Markets run but
hold a healthy cash reserve to take advantage of "weaknesses" in asset
prices when they arise.
Learn
The
great American Fund manager, Warren Buffet has a fundamental investment
philosophy; he never invests in something he does not understand.
With
the plethora of information and reputable
Financial Planners
available to you in
these modern times, there is really no excuse for being financially
"illiterate".
Invest
in quality assets
In
times of low inflation/interest rates as we have at present, only a premium
investment will yield strong results:
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