Lowdown on investing

Published in the Sunday Examiner, May 2014 by David Potts

Tips for finding a strategy you’re comfortable with.

You didn’t need the budget to tell you that you are on your own, although a reminder every now and then never goes astray.

To get ahead, you must invest, especially while interest rates are low, where they are destined to remain for some time.

Where and how should you invest? 

The cardinal rule is know thyself. 

If the thought of shares jumping up and down willy-nilly worries you, consider property.

If you don’t want to tie your money up in something that is always requiring attention or repairs, then the sharemarket might be a better fit. 

If neither appeals, read on. You might surprise yourself.

Oh, and if you want to borrow, the interest component of your repayments is tax deductible whether you buy shares or property.

However, remember, just as using other people’s money can boost your returns because there is more on the line, it will exaggerate any losses.

And don’t negatively gear. Paying out more than you earn in rent is for fools. It is a losing strategy that will bring you undone more quickly than it will the Tax Office.

Shares

Registering with a broker — CommSec is the most popular by a country mile — is easier than opening a bank account.

However, don’t rush it. The ASX also has an online simulated share game that teaches you about the market.

Brokerage is payable on buying and selling and is based on the value of the trade. It costs as little as $11 a trade at CMC Markets, the cheapest broker.

One of the biggest beginners’ mistakes is in thinking a 50-cent stock is better value than a $50 one, says Dale Gillham, chief investment analyst at Wealth Within, which runs the only accredited diploma in share trading.

So where do you start?

Go for any of the stocks in the top 20. They will be blue chip and have stood the test of time.

Fixed interest

Investing in bonds, debentures or anything else that pays interest for a set term is not going to make you wealthy, but it might stop you from becoming poor.

They are the safe ground between shares and cash — not high risk, a better yield, and the chance of a capital gain. As it turns out, some listed companies also issue bonds, although it is hard for ordinary investors to get their hands on them and even then you need to go to a fixed-interest dealer.

Fixed-interest investing also requires a slightly different mindset.

‘‘You’re looking for survivability of a company. With shares, you look at growth, ’’ says Elizabeth Moran, of FIIG Securities.

Property

With rates so low, property has never had it so good.

Perhaps too good, because by any stretch it’s expensive. The average rental yield is 4.7 per cent, the equivalent of the sharemarket’s p/e or payback period of 21 years.

Even for owner occupiers, mortgage repayments are approaching the highest proportion of income ever, according to the Reserve Bank.

Then again, the unique thing about property is that every home is its own separate market.

But there are some things a good investment property needs. It should match the demographic of the area. In the inner city or close to a university, for example, a unit will be more in demand from tenants than a house.

And you want to buy in an area with a rapidly rising population.

Super

The best investment you can make is salary sacrificing into superannuation. 

Not that super is an investment as such. 

It is a tax dodge for things you would invest in anyway.

Most super funds have more in shares than anything else, and for good reason. 

Your super has to provide a nest egg for you at the end of your working life and then, hopefully, many years of retirement. 

Earning interest alone is just not going to cut it.

Also, blue-chip shares come with franked dividends and, because super earnings are taxed at 15 per cent, whereas franking has a 30 per cent credit, it means more money flowing in courtesy of the Tax Office.

To learn how you can gain the required knowledge and skill to ensure your success in the share market click here.