Investing

Hi, I’m Bron Lawson from Westpac’s Davidson Institute here to talk to you about Investing. This video is one of a series that we have produced in conjunction with Ruby Connection aimed at helping women improve their financial confidence and wellbeing. We all have financial goals that we want to achieve. Whether that’s to buy a car or a house, to go on a long holiday, or to retire comfortably. Whatever those goals are, investing is a way to help achieve them.

In essence, it’s simply making our money or assets work for us to earn more money. But the sheer variety of different things that you can invest in, each offering different rates of return and levels of risk, means getting started may be a daunting prospect for those new to investing. In this video, I’m simply going to introduce some of the different investing concepts to get you underway on your investing journey.

Before I begin though I need to let you know that this presentation is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.

We’re going to cover: • where to start, • what options are available to you • where you can go for help. So, let’s get started with ‘where to start’.

Your personal cash flow starts with your primary cash inflow, which is generally your salary or wage and is often all the money you have available to achieve your future financial goals. This income is then used in a number of ways to support our chosen lifestyle. We call these outflows, and we have broken them down into 4 buckets. They are: Spend It Now: which is all your regular household expenses that you need to pay to live. Things such as rent, mortgage, food, transport and so on.

Then you have spend it later: which is the money you save to spend on future expenses, such as holidays, school fees, new furnishings and so on. After that, you may choose to … Gift It: this may be donating to charities or saving and buying gifts for others. Finally, there’s … Grow It: where you actively choose to use a portion of your primary income to grow your wealth through investing.

The purpose of the Grow It bucket is to create a secondary inflow of money from your investments to supplement your cash flow and grow your wealth. The foundation of this model is your budget which is all about how you choose to allocate your income to each of these buckets.

This video specifically looks at the ‘grow it’ portion of your money and how you can create that secondary flow of income. There are plenty of different investment options available. However, it’s important that you spend some time working out exactly what you want to achieve. What are your financial goals, and when do you want to achieve them by? This way, you can choose the most suitable investment options for you to help achieve your goals.

A common question from new investors is ‘when should I start investing?’ But the answer to this question will be different for everyone as they have different incomes, different expenses, different lifestyle choices, and different motivations. And, of course, your financial goals and the resources you have to achieve them will change over time. Depending on where you are throughout your financial journey you’ll be looking to achieve different things from your investing.

You may want to invest to create more cash flow, like that secondary inflow we saw earlier. Or you may want to invest in assets whose value will grow over time creating long-term capital gains. Many people use a combination of the two. By clearly identifying your investment goals, you can then develop your investment strategy to achieve those goals. Another couple of elements that’ll determine your strategy are the time you have available to you, and your risk appetite.

Firstly, time. There is an old saying – “It's time in the market, not timing the market that counts”. When investing, time is a critical element. One of the best investment decisions that you can make is to start investing sooner, rather than later. The longer your money is invested, the more opportunity you have to ride out the risks and reap the rewards.

There are three benefits that time provides to investors. Firstly, compounding of interest, then time to make additions, and thirdly time to ride out volatility.

Compounding is where you reinvest your earnings in the investment and earn additional income on those returns. The most common example is the interest that you earn on savings. For example, if you have a deposit of $10,000 and it earns 5% interest per annum, then at the end of the first year, you’ll have $10,500. The original $10,000 that you deposited, and the $500 that you earned in interest. In the next year, if you leave the earnings in the deposit, you would be earning interest on $10,500.

The longer you leave your savings and earnings untouched, the more benefit that you get from compounding. In this scenario, if the investment was left untouched for 20 years it will earn $16,533 in interest and you’ll have a total of $26,533. Let’s build on that because time also allows you to continue to add to your investment. Continuing with our earlier scenario of a $10,000 deposit, let’s add $1,000 per year over the 20 years so you’ll have saved $30,000 in total.

Again, if you receive 5% interest each year and reinvest it, you’ll earn $29,599 in interest. Meaning you’ll have $59,599. Even if you only start with a small amount and continue to make small regular additions, this will add up over time. And the longer you continue to do this, the greater the amount you’ll have invested either creating additional cash flow or increasing in capital value.

In the example we just looked at we have assumed a 5% return every year for 20 years. However, in reality, investment returns fluctuate and can sometimes even be negative. These fluctuations are known as volatility. Volatility is one of the risks of investing. However, by spending time in the market and continuing to make additions to your investments, volatility can be managed.

The other consideration we mentioned was that of ‘risk appetite’. It’s important to understand that, regardless of how you invest your money, there’s always an element of risk involved. Generally speaking, the greater the risk, the more financially rewarding the return. Your appetite for risk will be determined by the amount of time you have available, and how willing you are to accept any potential losses that your investments might incur.

As an example, let’s say that you’re 60 years old and are looking to have enough money to support you in retirement. You‘re much less likely to take a risky investment in this situation because you only have a limited amount of time to recoup any losses. However, if you’re 25, looking to achieve the same outcome, then you may be much more willing to take risks, as you do have time to recoup any losses.

So, once you’re clear on what you’re looking to achieve out of investing, you can then start to consider what investment options are more likely to help you achieve those goals. There are four main investment types.

The first investment type to consider is cash. Cash investments are generally the money held in a savings account. The benefit of investing in cash is that it’s flexible, allowing you to move it around to take advantage of better offers, or being available for use in the case of an emergency. Cash is considered a low-risk investment but generally doesn’t earn as high a return as some other investments.

The second investment type here is fixed interest. Fixed interest investments are generally term deposits or bonds. Term deposits are investment accounts offered by financial institutions that offer a fixed rate of interest on your money for investing it for a fixed time. This may be for as little as 1 month or as long as 3-5 years.

Bonds, on the other hand, are generally issued by governments, semi-government bodies or corporate bodies as a way to raise capital, so bonds usually have a longer investment term than cash investments, often ranging from 1 to 10 years. In return for your money being locked away for a fixed time, fixed interest investments will generally pay a higher return than cash investments.

Depending on the type of deposit or bond it may also provide a regular income stream if the interest is paid regularly throughout the investment period, as opposed to being paid in full at the end. The fixed interest market is considered low to medium risk.

The third investment type is property. When investing in property, you can benefit two ways. Firstly, there is the potential for capital growth, with the value of property generally appreciating over time. Secondly, there is the rental income that can be earned from the property. Investing in property is a longer-term investment proposition.

It’s considered a medium-high risk investment because it may be harder to sell the property should you need to convert the investment back into cash; and also, because the rent yield is not guaranteed.

The fourth investment type is shares. Investing in shares is essentially investing in a business. Your money is used to operate the business and if the business is profitable it should increase in value over time and will potentially pay its shareholders a share of the profits, known as dividends. This means that, like property, there is potential to get both capital growth, and income. Shares also have medium to high level of risk and the share market is subject to the most volatility of all.

Historically though returns on share portfolios have generally outperformed the other investment types over the long run, although property is not usually far behind.

Another common question asked by new investors is ‘what’s the best thing for me to invest in?’ And again, that will depend on your personal situation, goals and so on, however, what I would say is ‘don’t put all your eggs in one basket’. For many people, their investment portfolio consists of just an investment property. Now if something happens to that property, then they’ve potentially lost some or all of the capital they invested.

One way of reducing this risk is to diversify … that is to split your investments across the different types of investments. By diversifying, you’re spreading the risk and, generally speaking, improving the likelihood of better returns.

When investing, it’s important to start with your own goals and risk appetite before you look at investment options. When you start looking at investment options, you begin to realise what a large field of expertise it is. A lot of people can find the sheer amount of information overwhelming. That’s where it pays to get expert help and advice.

Information is your best friend when it comes to investing. The more informed you are about the market and your options, the more confidently you can make decisions based on that knowledge. Seeking out that information yourself, from the internet or other reliable sources, enables you to ask more qualified questions of finance professionals.

A great source of information and expertise are professional financial planners or advisors. One benefit of using a financial advisor is that you have access to a wealth of knowledge about investing, relevant legislation, current market conditions, and anticipated changes to the markets. They’re also heavily regulated as to the advice they can provide, and the products they can provide. This aims to reduce the risk associated with your investments and maximise potential returns.

Financial advisors will also look at your finances from a holistic perspective taking into account your personal goals, lifestyle objectives, and risk profile. Their purpose is to provide long-term strategies to help you achieve those goals. As well as wealth creation, they can often also help with superannuation and retirement planning, wealth protection, and estate planning.

While there are costs associated with using a financial planner these should be considered in light of the higher returns they’ll potentially achieve for you, as well as the considerable time saving for you in researching and establishing your investments.

Finally, to get the best out of your experts/advisors you need to communicate regularly. Keeping in touch with what’s happening in the market and any changes to your situation, enables you and your advisors to make any changes sooner rather than later; to either reduce the impact of bad news or take advantage of good news as opportunities arise.

It’s therefore really important to choose a financial advisor that you feel comfortable working with and that you believe has your goals firmly in sight when making recommendations about your investments.

Once you’ve chosen your financial planner it’s then a case of working together to achieve your goals. To do this, at your initial meeting, your planner will gather lots of information from you. Such as, your current financial position – what assets you own; what money you’ve borrowed and the repayment arrangements; and what insurances you currently have in place. They will also ask about your current personal situation – such as family, carer responsibilities, work, and desired lifestyle.

Then, of course, they will seek to understand what your goals are, what time frames are available, and what your risk appetite is. While this might seem like a lot of private information, the more information you provide, the more relevant and appropriate their recommendations should be.

Once they have gathered all the appropriate information, the planner will then present you with a set of strategies or recommendations to help achieve your goals. Depending on the amount of information they need to source, or the complexity of the proposal, this may take a week and sometimes more to develop.

This is presented to you as a Statement of Advice which should also include the reasoning they have applied in giving each recommendation. It’s then up to you to decide which recommendations you’ll accept and implement.

The planner will then undertake the implementation of the agreed strategy. This may include things such as consolidating superannuation accounts, establishing new investments, implementing wealth protection policies, among other things. Again, this may take some time depending on the complexity of your situation and plan. Once your strategy has been implemented it’s good practice to regularly review the plan to ensure it remains relevant as things will change over time.

So, to wrap things up … we started out by looking at why we invest and some of the things we need to consider in developing our investment strategy … things such as understanding what our goals are, how much time we have available to us, and what our risk appetite is. We looked at the various investment options available and their risk vs return. And finally, given it can be a complex undertaking, where we can get some help and how do we make the most of our professional financial advisors.

Thanks for watching ‘Investing’. I hope you found this video helpful and encourage you to check out the other resources on the Davidson Institute and Ruby Connection websites to help build your financial confidence. Bye for now.