Laura Henschke, 28, has different aspirations to her father Mark when it comes to buying a home. Photo: Tamara DeanYou didn’t need the budget to tell you that you are on your own, although a reminder every now and then never goes astray.
To get ahead, you must invest, especially while interest rates are low, where they are destined to remain for some time.
An online saving account is not going to hack it. The return is low, it is taxed and it is eroded by inflation.
Where and how should you invest? The cardinal rule is know thyself. If the thought of shares jumping up and down willy-nilly worries you, consider property.
If you don’t want to tie your money up in something that is always requiring attention or repairs, then the sharemarket might be a better fit. If neither appeals, read on. You might surprise yourself.
Oh, and if you want to borrow, the interest component of your repayments is tax deductible whether you buy shares or property.
However, remember, just as using other people’s money can boost your returns because there is more on the line, it will exaggerate any losses.
And don’t negatively gear. Paying out more than you earn in rent is for fools. It is a losing strategy that will bring you undone more quickly than it will the Tax Office.
Registering with a broker – CommSec is the most popular by a country mile – is easier than opening a bank account. It will only take a few minutes and you can buy shares straight away.
However, don’t rush it. The best way for beginners to get used to the sharemarket is to do some pretend or paper trading for a few months.
The ASX also has an online simulated share game that teaches you about the market.
Brokerage is payable on buying and selling and is based on the value of the trade. It costs as little as $11 a trade at CMC Markets, the cheapest broker.
One of the biggest beginners’ mistakes is in thinking a 50-cent stock is better value than a $50 one, says Dale Gillham, chief investment analyst at Wealth Within, which runs the only accredited diploma in share trading.
”They believe they get more shares and, as such, are more likely to get a better return, which is simply untrue,” he says.
Another is not having a selling price in mind when you buy. If nothing else, this concentrates the mind wonderfully, because it will force you to put a value on the stock, which in turn will mean doing some homework.
”Your exit price is more critical than the buying price,” Gillham says.
So where do you start?
Go for any of the stocks in the top 20. They will be blue chip and have stood the test of time.
”Anybody can throw a dart and pick shares, but managing risk is the most important aspect of investing.
”Preserving your capital and your profits from downturns in the market is critical to long-term success. If you don’t lose on a stock, then you don’t have to find a way to make up for it,” Gillham says.
Top blue chips are less volatile and always fare better, which is not to say they are immune from any market bad-hair day.
However, there are other ways to get into the sharemarket without having to pore over annual reports yourself.
One shortcut is a managed fund, usually bought through a financial adviser, where it is all done for you. Since it does not trade on the ASX, you will not know how it is faring day to day unless you specifically ask. This might not be such a bad thing.
You can get the same thing in listed investment companies, or LICs, which also manage a share portfolio. You will know what the LIC is worth every second of the day, like any other share, and they are easy to get into and out of.
Their annual fee is also cheaper than a managed fund’s.
But cheapest of all is an exchange-traded fund (ETF), a sort of cross between the two. LICs and managed funds are actively managed, whereas an ETF follows a predetermined index such as the ASX top 20.
One other thing is that managed funds and ETFs are always valued at what their portfolios are worth, but LICs can stray, and do most of the time, from their real value.
Sometimes that is an advantage – you can buy them for less than their portfolios are worth – but at the moment many are trading at a premium to their underlying value.
Speaking of which, are shares reasonably priced at the moment?
Only just, going by the price-to-earnings (p/e) ratio.
The market’s p/e is about 15, which means shares trade on 15 times companies’ earnings for the financial year. That is right on its long-term average.
Over time, you can expect the market to average a 10 per cent-a-year return including dividends.
Average is the operative word: it is hardly ever that in any particular year.
And here is a sobering thought. A 50 per cent drop in price requires a 100 per cent increase just to get back to where you were.
Investing in bonds, debentures or anything else that pays interest for a set term is not going to make you wealthy, but it might stop you from becoming poor.
They are the safe ground between shares and cash – not high risk, a better yield, and the chance of a capital gain. As it turns out, some listed companies also issue bonds, although it is hard for ordinary investors to get their hands on them and even then you need to go to a fixed-interest dealer.
Fixed-interest investing also requires a slightly different mindset.
”You’re looking for survivability of a company. With shares, you look at growth,” says Elizabeth Moran, director of education and fixed income research at FIIG Securities, a bond dealer which offers $10,000 parcels of bonds as part of a $50,000 investment.
Qantas is a classic example. You wouldn’t want to buy its shares, but there is no question of it meeting its financial commitments. Its bonds with a face value of $100 mature in 2020 and have an interest yield of 6.5 per cent a year.
A bond yield is the fixed-interest version of dividend yields: in this case the interest divided by the price you paid. So the more the bond costs, the lower the yield.
If you think rates are going to drop you would want a bond, because its price will rise.
A rate rise would lower the price but all is not lost. Some bonds have a floating rate tied to the money market and are usually adjusted quarterly. When rates rise, so does your return, without hurting the bond’s price. It might even rise, because the bond will be paying more.
Bendigo and Adelaide Bank’s floating bond is yielding about 5.6 per cent, Moran says.
With rates so low, property has never had it so good. Perhaps too good, because by any stretch it’s expensive. The average rental yield is 4.7 per cent, the equivalent of the sharemarket’s p/e or payback period of 21 years.
Even for owner occupiers, mortgage repayments are approaching the highest proportion of income ever, according to the Reserve Bank. Then again, the unique thing about property is that every home is its own separate market.
But there are some things a good investment property needs. It should match the demographic of the area. In the inner city or close to a university, for example, a unit will be more in demand from tenants than a house.
And you want to buy in an area with a rapidly rising population.
The more sought-after units are close to transport, shops and parks or beaches. For houses, you could add proximity to a high-rating NAPLAN (National Assessment Program – Literacy and Numeracy) school.
Look beyond your own backyard. The ideal investment property might not be in your street, city or even state.
It will be where there is ”a population growing faster than the national average, a median household income growing faster than inflation, strong infrastructure plans designed to provide extended and appropriate services to the growing population [such as transport, schools, roads and shopping precincts] and a local government with progressive town plans and money to commit to the area,” property expert and author Margaret Lomas says.
”There is still a little bit of life left in Western Sydney. After that, I really like Brisbane suburbs. Nundah, Albion, Runcorn, Upper Mount Gravatt and the Logan shire, to name a few. In Melbourne: Narre Warren, Epping and Meadow Heights.”
The best investment you can make is salary sacrificing into superannuation. Not that super is an investment as such. It is a tax dodge for things you would invest in anyway.
Most super funds have more in shares than anything else, and for good reason. Your super has to provide a nest egg for you at the end of your working life and then, hopefully, many years of retirement. Earning interest alone is just not going to cut it.
Also, blue-chip shares come with franked dividends and, because super earnings are taxed at 15 per cent, whereas franking has a 30 per cent credit, it means more money flowing in courtesy of the Tax Office.
By the same token, you need diversity, because the sharemarket may not be there when you need it. Just ask all those baby boomers who had to postpone retirement because they were hit by the global financial crisis.
The typical balanced fund, which is what you are in unless you told your boss otherwise, has shares, fixed interest, some cash, international investments and probably some property.
It is like a one-stop shop for an investment portfolio, but with tax breaks. These include 15 per cent taxes on salary-sacrificed contributions and the fund’s earnings – in both cases instead of your marginal rate.
Even so, it doesn’t suit everybody. If you are under 40, you are probably better off in a growth option which will stick more in shares, but if you are over 50, something more conservative might be better.
Or you can always run your own fund along with more than half a million others, but you need to have at least $200,000 in it for it to be worth the accounting, auditing and government levy fees.
There are also strict limits to how much you can salary sacrifice a year, which is not helped by the fact that your boss’s 9.25 per cent contribution counts towards the ceiling as well.The generation gap
Most baby boomers think the younger generation will do it tougher financially than them – but the Henschke family suggests perhaps not.
The two generations have quite different aspirations about buying a home. According to a survey of ”affluent investors” by asset management firm Legg Mason, 70 per cent feel ”investment prospects would be worse for future generations”. And fewer than half of them are convinced they’re saving enough for retirement.
Legg Mason’s Matt Schiffman’s advice is to ”invest early in life and make sure you understand what you’re investing in”.
At 28, Laura Henschke, says: ”Time is getting on. I’ve worked hard to pay off my debts and am now able to consider investing.”
Although she and her partner, Michael, will invest in property, they aren’t keen to buy a place to live in. Yet, at her age, baby boomers were typically already buying their dream home.
Her retired dad, Mark, who runs his own super fund, says: ”For my generation it was ‘buy a home’, and that was it.”
But Laura, a laywer, says the couple prefers ”to invest at this stage. I don’t have a desire for a big house. We’d rather invest wisely. Eventually in our late 30s or early 40s we might get a house.”
Mark says if he had his time over again he’s not sure he would have bought a home first. ”Maybe there would be different choices,” he says.
Read David Potts in Weekend Money, in the paper each Sunday.
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