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Budgeting & saving

To save or invest?

02 June 2017

Peter Foley

Peter is a CERTIFIED FINANCIAL PLANNER® with more than 20 years in the financial services industry. He is the Director of Thirdview Financial Planning Pty Ltd, which he started in 2009.

In today’s low interest rate environment, it’s hard to get ahead with your savings to buy a home or other personal goals. But if you don’t have much to lose is it too big a gamble to be investing your money instead?

This article draws on expert advice from a planner about whether investing is a good option for making more from the money you have. We’ll talk about different strategies and asset classes you might use depending on how much you have to invest and how liquid you want your investment to be – timeframe for investing.

In today’s low interest rate environment, it’s hard to accumulate that stash for your first home or other dreams. But which will get you there quicker: saving or investing?

Peter Foley CFP®, a financial planner at Thirdview, explains that in the past, people could get ahead by saving – that is, by putting their money into a safe bank savings account or fairly secure types of investments such as term deposits.

“These provided a reasonable rate of return without carrying a lot of risk,” he says.

“But not anymore, with interest rates being as low as they currently are. After inflation and tax, they could actually be making a loss.

“The question we ask our clients in Sydney who are looking to build a deposit for a home is whether they can save at a rate that is faster than the growth rate of Sydney property prices. If they can’t, they will just get further and further behind their purchase point.”

So, if saving won’t get them there, what else can they do?

Foley says other options such as shares and property come with certain risks which not every investor is comfortable with taking.

“I ask my clients what is better, investing and carrying some investment risk in your portfolio or not investing and having the absolute knowledge you won’t have enough to buy a home,” he says.

But if you have to make that choice, much depends on how long you have to achieve your goals.

For example, Foley explains that it would be unwise to put your money just in shares if you plan to buy a home in two years’ time.

“What if when the time comes for you to draw on the investment to buy the property and you find the market has gone against you and has fallen?”

Shares allow you to own a piece of a company and can be bought on the stock exchange or through Exchange Traded Funds (ETFs) or managed funds. They typically return more than cash or fixed interest over time, but they are also a volatile asset class and can be influenced by a wide range of factors here and abroad.

No doubt you’ve seen the news headlines that something has happened to wipe billions off the value of the Australian Securities Exchange or, at other times, that Australian shares have reached record highs.

That is why Foley typically recommends only investing in shares if you have a five to seven-year timeframe to do so. Over time, the ups and down of the share market are likely to be evened out and if you have the right portfolio, you could grow your wealth more quickly than through cash or fixed interest.

“It’s a three-pronged assault: the value of what you have, the investment returns through share price gains and dividends, and the benefit of compounding where your returns are continually reinvested to give you more returns. As a result, you are likely to achieve a better outcome over a five to seven-year period,” says Foley.

A similar timeframe is required when investing in listed property stocks. But Foley cautions that listed property is more volatile than other shares and will provide greater income as opposed to growth.

That’s not usually appropriate for younger investors looking to grow the total value of their assets, for example, to put together a deposit on a home. These investors should be looking to gain from a rise in the share price, rather than focusing on what dividend payouts they will receive. In contrast, older investors may rely more heavily on dividend payouts for regular income to live on.

Foley also advises investors not to put all their eggs in one basket. “It’s important to diversify your portfolio, not just across asset classes, but also regions, such as Europe and Asia, as well as countries, for example the US and China, and across sectors. You don’t just want to be in mining. And you might also want to be in good IT companies, which Australia doesn’t have.”

Diversification will reduce the risks within your portfolio because a booming sector or country can help smooth out losses in other areas of your portfolio that aren’t doing as well.

Foley believes good Exchange Traded Funds (ETFs) can help you diversify across regions and sectors. “Some are passive and will seek to replicate an index – for example, the S&P 500. Others are actively managed and have a dynamic asset allocation.”

Foley adds that younger investors without a lot of money should also consider types of investments that aren’t going to cost a lot. “They need to get the most bang for their buck and be financially efficient,” he says.

“To do that, they might want to look at an ETF, a direct shareholding, or a combination of the two. Managed funds might be expensive for people with small amounts of money. They charge you a percentage of the funds they are managing for you every year. In contrast, with a direct equity portfolio, once you buy the shares or ETFs, there are no further holding costs.

“Index or passive funds are also lower cost funds. They can help you build up capital. Once you have done so, you can start looking at active managers and other strategies.

“Having said all this, it does take some expertise and research to select the right stock. That’s where good advice or a financial planner can help.”

Overall, to get ahead and closer to your goals, Foley advises: “Follow some good rules – that is, spend less than you earn, manage your debts well, consider gearing and protect your ability to earn. That doesn’t mean just thinking of insurance. It means thinking of yourself as a commodity, investing in your education and being well networked.

“Also, don’t make bad investments. A bad investment isn’t just shares and property but anywhere where you spend money. A fancy car depreciates by around 20 per cent the moment you drive it out of the showroom and then you are also paying interest on it. Think what you could have done with the money, plus the compounding opportunities lost.”

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