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By Mark Bouris
By the time you’re employed and receiving superannuation, you have an opportunity to invest for your future. It can be confusing and it shouldn’t be.
So here’s 10 basics investment principles for those aged 30 and under.
- Time: time is your second-greatest asset, after the ability to generate income. Time drives the compound effect, where returns on your assets are added-in to your lump sum. $1,000 that’s earning five per cent p.a. doubles in fourteen years thanks to compounding. If you’re a 25 year-old woman, you have another 70 years of living and letting compound interest work its magic.
- Investment: don’t confuse investment with saving. Investment is developing an appreciating asset in the long term so it eventually generates income. Saving is accumulating cash for short-term goals such as house deposit, holiday, car and university fees.
- Risk-Return: investing is a trade-off between risk and return, so to get high returns you take more risk (of the value going up and down) in assets such as shares. To ensure your returns, you have to stay invested for the long term.
- Risk profile: the most important aspect of your profile is age. In your age group you have many decades to weather the ups and downs of share markets, so you enjoy the gains. Your greatest risk is probably inflation, which reduces the spending power of your cash by around 2.5 per cent each year.
- Superannuation: super is not an asset class – it’s a tax-friendly investment vehicle that will deliver an income for you in your post-working years. Make sure you’re invested in super fund options that give you the best chance of building a large nest egg.
- Property: if you can’t buy where you want to live, buy an affordable investment property and ensure it yields capital growth and income. There are tax-planning factors in property so model the investment with an accountant.
- Goal: always create your own goals. It makes it easier to find the products, solutions and strategies relevant to you.
- Advice: you don’t necessarily need full financial planning to gain expert insight. Some advisers will deal with you on an hourly basis and your super fund fees might include advice – use it!
- Help: you don’t have to know everything. Try online apps such as Acorns and Self Wealth, which have smart options, at low cost without too much detail. To invest in shares without expertise, you can ‘buy’ the market: managers have funds that track stock exchange indices and you can buy exchange-traded funds (ETFs) that track indices of major stocks, such as the S&P ASX200.
- Diversify: don’t place all your wealth in one asset, one asset class or one industry. Don’t overweigh yourself with for instance property, or mining shares – concentrated portfolios can fall faster and take longer to recover.
Finally, never take your eyes off inflation – the quiet destroyer. You can overcome the ‘risk’ of shares going up and down, by using time. But if you become too conservative and put all your money in cash, time allows inflation to win.