How to maximise your life savings
I have a bit of a shoemaker’s children problem. Happily, my grownup kids all have shoes, but while their dad has spent 45 years in the investment field, they (and their partners) have very little interest in – or knowledge of – what makes a good investment plan. They’re just not that interested in money and have many other things demanding their attention, including my young grandchildren. I salute that. But one day money is going to be what supports their retirement. They really do have to get a grip on the basics of investing!
So, on a family Christmas holiday, I cobbled together 10 simple investment rules…and shared it with them. My point was that good investing doesn’t have to be complex or too time-consuming. But they really do need to know the basics.
My colleagues at Retirement Essentials think these rules provide a great jargon-free explanation of the basics of investing. They’ve prompted me to share them with you, the Retirement Essentials members, so I’ve adapted them for people in or nearing retirement. Read on for a simple overview of the fundamentals of investing – and be sure to let me know if I’ve missed anything important!
Jeremy Duffield’s 10 Rules for Investing
1. Recognise the importance of learning how to make your money work for you.
Before you retire, you work for your money. When you retire, you’ve got to make your money work for you. So, spend some time learning about how to do that.
The basics are not that difficult.
And the basics are what you need.
You don’t need fancy lessons or fancy pants stuff.
You just need the basics.
2. Have goals in mind.
Your goals are likely to be a mix of:
- preparing for retirement
- current and future spending needs
thus ensuring your money lasts your retirement.
3. Understand the importance of compounding
Einstein called compounding the 8th wonder of the world.
That’s because it is.
In simple terms, this means earning a return on your money, then a return on your return.
The higher the rate of return, the bigger the impact of compounding.
That’s why you seek higher return investments (which usually involve more short term risks).
But compounding works over time, which means you should start now.
And why a long term focus is important as an investor.
4. Invest in shares/stocks for the long term
Shares of companies have provided the highest returns over the long term, compared to most other asset classes.
That’s because they allow you to participate in growing profits and dividends of companies in a growing economy. Over time, share indexes have returned about 10% per year over the long term. Vanguard provides a great chart to illustrate this.
But shares can be volatile or risky, because the market is speculating on how much profit companies will make and how attractive that is compared to other investments.
But over a decade or longer shares usually provide better returns than other investments. It turns out, you are usually compensated for the risks over longer investment periods.
So, to reap long-term rewards, hold shares as the major part of your portfolio. That is, as long as you’re prepared to accept the risk and stick with it. Don’t chicken out. Which leads us to Rule 5…
5. Understand risk and how much you can tolerate. Manage this risk.
Investing is all about managing risk and return.
You hope for the return but can you tolerate the risk?
If you’re going to panic and sell out when things go bad, you shouldn’t take the risk in the first place.
The primary way to manage your risk is through careful asset allocation. ‘Asset allocation’ means your mix of shares, bonds, cash investments, property, etc. It’s the biggest decision and the biggest driver of your results.
You can choose an asset allocation that best suits your age, needs and temperament. For example, most super funds offer a choice of diversified funds. For example a super fund might offer four diversified portfolios across the risk spectrum, something like:
- Conservative: 30% Growth (Shares)/70% Defensive (bonds, cash)
- Balanced: 50% Growth (Shares)/50% Defensive
- Growth: 70% Growth/30% Defensive
- High Growth: 90% Growth/10% Defensive
Your fundamental investment question is: which of these is right for you?
My mother, known to my kids as Grannie Annie, was a very successful investor. She took a lot of risk for an old lady. She was about 100% in shares at all times even into her 90s. Most people wouldn’t be comfortable with that. I’ve typically been more conservative than Mum. Younger retirees can perhaps afford to take more risk and let time work for them. For those on a part pension, the Age Pension buffers the risk a bit, since with the Assets test, your Age Pension rises if your assets fall.
What’s right for you?
6. Be a tax-efficient investor
You can think of taxes as reducing your return. And thus the rate of compounding.
(You pay taxes on capital gains, interest and dividends.)
Superannuation is one of the best ways to invest tax-efficiently in Australia. So, in general, you want to put as much in super as you can. Your super is taxed at 15% when in accumulation (savings) mode and nil when it is in the decumulation (withdrawal) phase. You can flip this switch from 15% to zero in retirement by moving into pension accounts, potentially as early as at Preservation Age (60). But how you move to decumulation is a major retirement income decision and it’s important to seek advice before jumping into it.
7. Use diversified index funds or well managed super funds to make your life simple and your investing successful.
Investing in individual shares is a tough game for any investor. Consumers have to compete against professionals. It’s not worth the time, cost and effort.
Instead, use low cost diversified super fund options. And for nonsuper investments consider buying index funds that track the overall market as the simplest solution.
You can buy them as part of your super, as managed funds or as Exchange Traded Funds (ETFs). As my former boss and mentor, Jack Bogle put so simply: “Why search for the needle, when you can buy the haystack?”
8. Keep your cost of investing low
Costs come out of your returns. So, it’s best to keep them low. You can achieve this by:
- Buying low cost super.
- Buying low cost index funds.
It’s what you keep after costs and taxes that counts!
9. Avoid investment junk and salesmen.
Forget about crypto, like bitcoin. You just can’t value it.
Don’t listen to people who claim to know what’s going to happen or where you should invest now. And avoid investment fads and investment sales pitches.
10. Don’t try to time the market
It won’t work. Instead, buy and hold your investments.
Stay the course, which means, don’t sell out when times get tough.
Above all, don’t let emotions drive your decision making.
Jeremy Duffield
Retirement Essentials Co-Founder & Director
Need advice or support on your own financial investments? Why not book a Retirement Essentials Retirement Advice Consultation during which you can evaluate your own risk tolerance and check that your current investment settings are primed to maximise your overall retirement income?
What about you?
Do you agree with Jeremy’s top ten tips on investing? Or do you have others that have proven successful?
For those who don’t know Jeremy
Jeremy has worked in and around the world of financial investment for more than 40 years. Starting post-university with Vanguard US, he learned the craft of smart investing from one of the true gurus, his former boss and mentor, Jack Bogle.But being Melbourne-born and bred, it was natural he and his family would head back Down Under at some stage. And he did so to establish and head up Vanguard Australia in 1996. Seeing the need for affordable advice for retirees, he and co-founder Hugh Morrow established SuperEd and Retirement Essentials. Jeremy’s mission remains to deliver trusted and affordable advice to the millions of Australians struggling to navigate the complexity of retirement income and make their own best decisions.
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.
