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Wow! Can I say I was absolutely blown away by all the lovely encouragement I have received since my first nerdy article went to print. I am beyond excited that:
Perhaps the most common question I get asked ALL the time is “what should I invest in?”
FIRST DISCLOSURE- I am not a financial planner, so anything you read below is absolutely the ideas of a person high on caffeine and chocolate.
When you invest in something, you have the potential to receive return in two ways:
In my experience when women invest they almost always have an online savings account that they squirrel $50 a month into OR they buy shoes. Let’s pretend the day will come when we have enough shoes (as if) and we all start saving and have a little secret nest egg. Why do we like our online savings account so much? Because we can see it on our internet banking, it’s easy to set up and cash is comfortable- if you need it for whatever reason (like a shoe sale) you can get access to it quickly and easily…. Does this cover all the reasons you have a little cash nest egg?
Interestingly though cash doesn’t appreciate. You might be familiar with the term ‘inflation’ but if not- remember how you could buy a Bubble-O-Bill for $1.50 at the community pool 15 years ago, and now they cost $3.50. No, the pool isn’t making millions ripping you off when you buy an ice cream (or are they? Investigative
report for next month!) this is inflation. The same $1.50 buys less goods and is therefore worth less in real terms as time goes buy (if this phenomenon interests you google “time value of money”).
So, we must receive a really good income generation from the cash reserve account to make up for inflation right? Ummm…. Maybe not? Have you seen where interest rates are right now… in some cases you will find out that the income (interest) you receive on your cash account is no more than the inflation rate- which means you are actually losing money in real terms.
With this knowledge are we feeling a little braver to consider some other investment classes with some of the money you have parked in your cash account? What is an investment class I hear you ask? Well think about the term ‘investment’ like a shoe department… there are thongs (casual and easy but not super fabulous - kind of like your cash account!), sandals, wedges, kitten heels, etc. Lots of options and all with slightly different characteristics to suit different feet/investors/occasions.
Normally when someone has decided they don’t want to put their life savings in a cash account the first thing they ask is ‘what shares should I buy?’. Unlike depositing money into a cash account, when you buy shares in a particular company there is not a 100% guarantee that your shareholding (or investment) will appreciate nor do you know how much income (dividend) you will receive. This uncertainty is normally greater for the 2c shares than say, buying shares in Wesfarmers.
I am personally lazy- I don’t want to spend time researching individual companies and then spend time every week keeping an eye on the market… that sounds hard! For this reason, I love managed funds… you basically give a fund manager your money and they add it with other people’s money and invest it across a large variety of companies in different industries. You pick the fund you give your money to depending on how much risk you are comfortable with and whether asset appreciation or income generation is more important. You can start investing with as little as $5K and you can add to the fund monthly just like you do with your cash account. Once you get to $20K talk to the bank or your financial planner about a margin loan (if you are wanting to aggressively build your nest egg). Returns are not guaranteed but the fund managers employ smart people who are meant to know what they are doing and watch the share market all day every day.
Don’t like the idea of giving control of your money to someone else? Fair enough- I wouldn’t lend shoes to my sister either. What about real estate? The benefit of low interest rates is money is cheap to borrow… so why not use the nest egg for a house deposit. There are some great little cheap houses in Quairading… and a demand for rentals! Putting a high-quality tenant in the house we have bought will cover the mortgage (rent=income) while we wait for the property market to take off (asset appreciation) … I know this must sound mad… but perhaps the new industrial precinct in Quairading and airport in Cunderdin will see a new wave of housing demand and hence higher property prices*.
[*I’m not being paid by Terry or Gecko to tell you to buy houses in Quairading… disappointingly… talk about stingy!]
Another asset class that I find really interesting is that of Hybrids. Mainly issued by the banks as one of the ways to fund their balance sheet so that they can lend you money to buy an investment property in Quairading. They have a few different names- mainly they go by Convertible Preference Shares/Notes or Perls. Hybrids are the love child of a share and debt. If you buy a NAB hybrid (for example) and the NAB falls over, you rank before a NAB shareholder in terms of getting your money back but if things get a little hairy economically (think another Global Financial Crisis) you might get shares in lieu of cash when your investment matures. Normally the income (coupon) on this type of investment is paid quarterly and would be higher than your cash account but lower than buying shares in the same company. There is much more you need to know about this class and I am running out of word count- so google ‘hybrid securities’ for more general information.
When you are investing, you need to think about whether you are looking primarily for asset appreciation or income- the answer normally depends on what stage of life you are in.
If you are looking down the barrel of retirement, I would be focusing on investments that generate good income… so that you can live off that income without having to sell the investments (i.e. you can’t pay for a holiday with a block of land you own, but if you own a house you can pay for your next cruise with the rent you receive).
If you are desperately trying to save to pay for the purse destroying thing they call ‘boarding school’ I would be concentrating on investments that have the potential to have strong asset appreciation OR give you the ability to reinvest the income you receive from any investment you make.
This little article is in no means an exhaustive list of things you can invest in… there are honestly so many! But perhaps when you are looking at investments, ask yourself why you are investing, what your risk appetite is and whether income generation or asset appreciation is more important- the answer to these questions might help you weed out what you don’t want to invest in!
Please, please, please remember there is also no one silver bullet. We don’t keep buying the same pair of black ballet flats, we have a couple of different pairs of shoes to cover different occasions… take the same theory when you invest, spread your investments across a couple of different classes.
Finally, don’t forget to invest in yourself- sounds cheesy I know, but honestly why not spend some of your nest egg on a financial planner getting advice OR take a course to upskill yourself OR start a business based on your passion. There are not enough women in the world who know their worth- so take a chance, do some research and take charge of your finances!
Cheers and happy researching
FINAL DISCLOSURE: Don’t bail me up while I am buying chocolate to tell me my ideas caused you to lose your life savings. It’s your money and your future, do your own research and take ownership for the risks you decide to take.
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You can read the full version of the April 2017 Banksia Bulletin for free online right here: http://www.quairading.crc.net.au/banksia-bulletin.html
Written by Jill Hayes, CRC Coordinator