From Money Magazine, February 2005
There are sensible investing strategies for any age, as Peter Freeman reports
These are the early years when many people are relatively new to the workforce and are still renters. While some have formed a permanent relationship, many don’t have children. Home ownership and family are still in the future.
For this group the main financial focus is usually on saving a deposit for a home, an investment that has particular appeal due to its lifestyle benefits and capital gains tax-free status.
The first step for many will be to get their credit card debt under control and then eliminate it. Only then will they be in a position to start building wealth rather than simply paying for past consumption.
With interest rates having stabilised at relatively low levels and property prices still slipping, this age group stands to gain by saving for a deposit for a home so as to be able to buy when the market is weak.
Their main challenge will be to decide whether or not to try to supercharge their savings growth by diverting funds into a regular savings plan that invests in equity funds.
Callinan says building a deposit through investing in equity funds is a good strategy, but only if you can accept the risk that there could be a few years of flat returns.
“You also have to have a time horizon of at least five years, to give the investments time to perform,” she adds.
By their 30s, most people are in a permanent relationship, many have children and most have bought a home. The focus is usually on reducing their mortgage, possibly renovating and, where possible, attempting to upgrade to a better property.
Nash of Tynan Mackenzie says people in this situation should consider taking out income insurance, especially given the increased tendency of companies to respond to setbacks by downsizing.
At the very least they should be careful not to over-extend themselves financially, instead keeping money available for emergencies.
This may well involve delaying renovations. Alternatively, they should ensure their mortgage facility allows them to draw down more money quickly if they need funds in a hurry.
Of course, some people in their 30s will still be both mortgage and family free. This group may decide to try to catch up for lost time by aggressive investing, such as using geared share funds or by taking out a margin loan to finance a portfolio of direct share investments.
A small group will go so far as to use even more aggressive investments such as futures contracts, trading warrants and contracts for difference.
Nash stresses, however, that these should be approached with a great deal of care since, if handled badly, they can generate heavy losses.
Your financial comfort in your 40s largely depends on how much spending restraint you showed during the previous decade. If you were reasonably disciplined, there is a good chance you will be able to upgrade to a bigger home or, alternatively, carry out the renovations you deferred in order to finance investments.
However, the 40s is sometimes a financially difficult time for people who have children since they are now costing more than ever, especially if they are at private schools. This group needs to budget carefully. In contrast, those with relatively high incomes, or with few or no family responsibilities, should have the capacity to continue to use gearing to expand their investment portfolio.
The alternative will be to divert more money into superannuation. Unfortunately, while very tax-effective, money invested in super is locked up until you satisfy the various preservation rules.
These mean you can’t get your super before you are at least 55 and also retired. Super savings really only equate to financial freedom for people who are already in their early 50s.
This is a time for more sustained wealth creation due to higher salaries and fewer family costs (many children by now will be financially independent). Nash argues that the tax breaks offered by superannuation, plus the fact super savings will be more accessible, make this the preferred investment vehicle.
The other opportunity that often arises in your 50s is the chance to take more control over your life by establishing your own business, perhaps by getting a significant redundancy payment.
Even if the redundancy wasn’t voluntary, it can provide a valuable chance to build a new, financially viable life outside the 9 to 5 standard working day. But Nash warns it is particularly important to think very carefully before you use your family home as security for a business loan. “A debt-free home is usually crucial for any sort of financial freedom and should not be put at risk without a lot of thought,” he says.
The Sixties and Later
For many people in their 60s the main financial challenge is to invest their savings to generate a retirement income, and maximise their age pension. In most cases investments are built around some form of allocated or complying pension, in the process maximising tax and social security efficiency.
James of Investec says that, while there is a tendency for older investors to be extremely conservative, especially when the economic outlook is uncertain, higher life expectancy means a very defensive approach probably will result in your money running out.
This means investors should usually opt for an allocated pension that includes a reasonable exposure to both local and offshore shares, rather than a pension with a very high level of capital security.
While a conservative allocated pension carries less risk of suffering a sudden setback, it can also result in a low annual income and so increasing dependence on the aged pension.
Rules for us all
But whether you are in this, the fifth age of investing, or any of the other ages, all of us have to deal with the same economic and investment climate. We have to make the same range of crucial financial decisions, based on our assessment of the risks and opportunities that exist.
James says all investors need to guard against assuming the next five years will generate the same sort of returns as the last. “Expecting the second half of the decade to be just as good as the first half would be naive,” she says. “It may be, but there are plenty of reasons to think overall returns won’t be as strong.”
Among these facts are:
Returns over the previous five years or so from Australian shares have been so strong that, as has already happened with real estate, some correction at some stage is virtually inevitable.
There is no guarantee that one of the main drivers of local sharemarket confidence — the strong Chinese economy — won’t hit some adjustment problems, in the process dragging down local stocks.
The surge in oil prices could continue, squeezing consumers and slowing economic growth.
The $ could well remain at around current levels, rather than the much lower exchange rate that applied at the start of the decade, in the process maintaining the pressure on exporters.
As noted, the main implications of the shift to an era of lower investment returns is the way that making quick gains from the sharemarket or property is likely to be more difficult than in the previous five years.
One thing that won’t change, however, is the need for most people to adopt a suitable investment strategy and then resist the temptation to chop and change when a particular investment sector generates disappointing returns.
As already stressed, it is also crucial to avoid thinking you will be able to make big gains quickly. “Everyone wants to be rich tomorrow, but the risks aren’t worth it,” says Thornhill of Motivated Money. Impatience is our biggest barrier to serous and sustainable wealth creation.”
Stick with a Strategy
Callinan of Tandem stresses that, while a few investors make a lot of money by timing markets, they are the exception. She points out that even the professional managers who handle the investments for Australia’s huge superannuation funds often struggle to add value through timing.
Instead, they develop strict investment strategies and stick with them. “If you give yourself plenty of time and patiently stick with a well-designed investment strategy, you will almost certainly be a lot better off in 10 years time than those who don’t,” she says.