Investing your money is probably something most of you are already doing or have at least thought about doing at some point. It's something I get asked a lot.
But do you know what investment alternatives are available beyond the obvious?
Veteran finance expert Noel Whittaker shares his “Investment Alternatives” chapter from his book Making Money Made Simple.
Chapter 23: Investment Alternatives
In investing money the amount of interest you want should depend on whether you want to eat well or sleep well. – J. Kenfield Morley 1937
By now you have discovered the importance of working to a budget and setting aside a part of your income for the future. You also know the points to look for when you buy your own home, how to save money when buying a car, and the importance of having adequate superannuation.
Now it’s time to investigate some of the many other opportunities available in the investment world. In the past 20 years, the range of investments available, as well as general consumer awareness, has grown dramatically. In this section we will compare the other main investments so you will know if they are suitable for you.
The dictionary defines “investment” as “to lay out money so as to obtain a return”. It is probably hard to get a better definition because we can “invest” in a hugely diverse range of areas: good education, a new suit, the stock market or a holiday home. In each case, we are outlaying money (and often time) in the expectation of some future benefit.
Investments are like horses—a different purpose requires a different breed. No one investment can be all things to all people any more than a child’s pony can pull a plough or win the Melbourne Cup. It is important that you choose your investments wisely. To do this, you should think again about our goal setting principles.
Clearly define what you are trying to achieve and the resources you have to work with. Once you have crystallised your objectives you can think about taxation, inflation, rate of return and risk. In helping clients understand how to invest their money, we usually say: When you go out to eat, there are three areas from which you are likely to choose your meal. They are MEAT (lamb, beef, pork), SEAFOOD (oysters, fish, crab) and BIRD (chicken, duck, pheasant). On the investment menu you have three similar choices—cash, property and shares.
Just as a balanced diet may contain a selection from each group, a balanced investment portfolio should have an interest in the following:
1. Cash in some form (such as bank accounts, debentures, bonds, mortgage trusts, etc.).
2. Property (either on your own or through property trusts and syndicates).
3. Shares (either on your own or through equity trusts, insurance bonds, etc.).
Before we go any further, let me stress that everybody’s investment needs are different. It is important that each investment plays its part in the overall picture and that the investment be emotionally compatible with the investor.
Some of the major features to consider are:
1. Your age—a young person can take a risk, lose all and start again; elderly people must have security.
2. Your occupation—people with irregular and uncertain income, such as commission sales people and casual workers, should be wary of any investment that requires a fixed annual or monthly payment.
3. Involvement—do you wish to be actively involved with the investment or do you prefer a passive investment with no involvement at all?
4. Your “comfort zone”—do you have a nervous disposition and are likely to panic if your investments suddenly fall in value?
5. Your goal—is the primary objective of the investment to provide income, capital growth, or a combination of both?
The Golden Rule of Investment is: “The higher the expected return, the higher the risk”.
Let’s face it—if there were foolproof, high yield investments around for the asking, people who knew about them would keep the knowledge to themselves. It is important that you understand the importance of risk and relativity.
You should also know when to take a small risk to get a good return. For example, funds invested in a credit union or building society may be more at risk than if invested in a bank, but the overall extra risk is so low that there is no reason why people should not use the major building societies or credit unions. Unfortunately, many people are not aware of some of the biggest risks that still exist to rob the unwary.
Think about how much control you would like to have over your investment (this will depend upon your personality). For those who like control, the two most obvious avenues are real estate where you can buy and manage the property personally or the stock market where you make the investment decisions yourself. Just be aware that most factors affecting the PRICE of shares are outside of the investor’s control.
Always decide on how long the money can be left untouched. Investments fall into short-term, medium-term and long-term categories. A typical short term investment is money in the bank where it can be obtained immediately. Most medium and long-term investments have initial costs, and it is important to consider these before you make the final decision. A typical medium-term investment may be a mortgage trust where there are no exit fees provided the investment is not withdrawn until 12 months have passed. Long-term investments include real estate, property trusts, equity trusts and insurance bonds. Total fees to acquire and redeem these can be 4% or more. You should be cautious about investing in these areas unless you are prepared to leave the investment intact for at least five years—otherwise the bulk of any gains can be lost in fees or you may find yourself stuck in a flat economic cycle.
You never know when there might be an urgent need to raise money for an emergency. Therefore, a prime investment rule is never to invest all your money on a medium or long-term basis in case some has to be withdrawn in a hurry. Before investing, clearly understand how long it takes to cash in the investment, what fees (if any) are incurred, and whether the investment can be liquidated in part. Real estate is a particularly cumbersome investment that can be difficult to cash at short notice, and cannot be cashed in part. For example, if you own a block of units and need some money, your only option is to sell the whole building or borrow—you can’t sell the back steps. The advantage of investments like shares, listed property trusts, equity trusts and bond trusts is that they can usually be cashed wholly or in part within 28 days, and their redemption prices are regularly quoted in the newspapers.
There are certain investments, such as gemstones, antiques, carpets, stamps and coins, which require highly specialised knowledge that most of us do not possess. There can be large profits in these areas for the small percentage of people who have the natural aptitude, time and dedication to acquire the necessary skills. However, these avenues are best left alone unless you are prepared to put in the work to acquire the knowledge required.
If you've ever applied for any sort of credit or a loan, there will be a report about you with a credit reporting agency. Lenders will access and use these reports to decide whether or not to give you the credit you are after. Therefore, it is very important to be aware of what is on these reports.
Your credit report contains information about your credit history. The information is collected from credit providers, courts and other organisations by credit reporting agencies. Here is a sample credit report.
The purpose of the consumer credit reporting system is to balance protecting your personal information with the need for credit providers to have enough information to make a decision as to whether or not to provide you with finance.
Therefore, it is very important to be aware of what is in these reports and how you can make sure it won't impact your ability to get a loan.
For more information on credit reporting download this fact sheet or visitw ww.moneysmart.gov.au or www.oaic.gov.au
When you’re looking for a home loan, you could go to a finance broker or to a bank. While a bank will only offer you its own products, a finance broker is an industry expert who will take the guesswork out of finding the mortgage product that suits you and your needs.
It’s understandable that finance brokers are now the number one choice for consumers who are seeking a home loan or to refinance an existing loan. Businesses are also engaging finance brokers to help them with their finance needs from car and equipment leasing to loans to help their businesses expand.
What can a finance broker do for you?
Finance Brokers already know the industry, the lenders, their products and their requirements, saving you a lot of time and energy on research. They will also put the time into finding out about your particular credit situation and have a wealth of experience to draw on to help you simplify it.
Translate industry jargon
Finance brokers are able to make sense of what loan documents and lenders are saying – put it into lay-person’s language, so to speak.
Get you what you want
Advisers will determine your borrowing needs and fiscal ability, and choose the only an appropriate product to suit your requirements.
Give you a broader choice
Being brokers, finance brokers have to offer a larger selection of loan products. While a bank can only offer you its own products, finance brokers can help you choose from a selection of loans provided by different lenders.
Help you compare apples, oranges and the whole fruit basket
Finance brokers have the knowledge and tools to compare often hundreds of products and you get a loan suitable for your circumstances and needs.
Find you a good deal
Loan providers are always spruiking a special deal or two, and these could make a big difference to your repayments or success rate. A finance broker will know which of the deals on the market at the moment will be appropriate for you.
Act as your advocate
A good finance broker wants the best for you, the client. They will be your cheer squad, middle-man, team player and coach throughout the process.
They’re in it for the long haul
A finance broker won’t just love you and leave you – they will oversee and manage the loan’s progression right through to the end on your behalf. By the way, ‘the end’ isn’t when you sign the documents and buy your property; you can expect your finance broker to keep track of you and your changing needs, helping you should you need to switch products or wish to purchase another property.
The key is to choose a finance broker who is MFAA-accredited. The Mortgage & Finance Association of Australia (MFAA) is the peak national body representing professional finance brokers across Australia, and all members must adhere to professional development standards and a stringent code of conduct. Find an MFAA-accredited adviser here. An MFAA Approved Finance Brokers is much more than your average mortgage broker.
Catherine Thompson at Volare Home Loans is an MFAA Approved Finance Broker.
Article supplied by MFAA
Message from CAtherine
Occasionally I come across an interesting article to do with Home Loans. I thought I'd share some of these with you here.