Money made Simples

Property, shares, ETF’s, superannuation, fintech, managed funds, listed property funds and more. There are so many ways to invest now that we generally do one of two things: we default to what we know and what feels safe, which is usually property or we do nothing because it’s just too overwhelming.

Remember our conversation with paths and choices and designing a life you love?

When it comes to investing sometimes we simply default rather than design because it all just seems too confusing and we’re not sure who to trust when it comes to advice.

When it comes to investing sometimes we simply default rather than design because it all just seems too confusing and we’re not sure who to trust when it comes to advice.

The problem is, in a time of soaring property prices and earning a teeny amount of interest in our bank accounts it’s a great incentive to consider some alternatives when it comes to investing. Or to dip our toe into investments that perhaps we hadn’t considered before. Which means taking a deep breath and at least starting to look at your options.

Here, we’re going to look at a few different options to consider when you’re investing so that you don’t opt out or default only to what feels safe and familiar.

Property

The great Australian dream is still to own your own home. It’s the largest purchase many of us will make in our lifetime and owning it often feels like a rite of passage: proof you have finally grown up and are putting down roots.

With the median home prices in some suburbs well out of reach of many potential homebuyers it is certainly a dream worth reconsidering. The problem with the alternative of renting, is that you’re paying down someone else’s mortgage and not accumulating any assets of your own. That is, unless you consider a third option which is renting where you live and buying property as an investment only.

If you’re weighing up whether home ownership is right for you and whether perhaps you should consider renting and purchasing another type of investment such as an investment property instead, what should you consider?

…with a bit of creativity and certainly the courage to swim against the tide, you may find that home ownership simply isn’t the right fit for you, allowing you to look for bricks and mortar in investments other than the home you might possibly live in.
However, there appears to be a growing number of people (particularly young people) questioning whether we should bother.

I believe we’re already very aware of the argument for home ownership, so here’s the argument for renting and buying an investment property instead.

1. Negative Gearing. Current Australian tax laws allow you to claim the shortfall between interest, expenses and income earned on a rental property on your tax return. This essentially means the refund (or tax saving) received is reducing the cost of ownership. If you buy your own home none of these costs are deductible and unless you take in a boarder, there’s no-one helping you pay the rent.
2. Spreading the risk. Our home is often our most valuable single asset which for many of us, means most of our wealth is tied up in it. The problem arises when the size of our mortgage means the ability to diversify our risk is diminished. We simply can’t afford to invest in other assets such as investment properties, shares or paying extra into super because, thanks to a high six or seven-figure mortgage, our cost of living is too high. Instead of sinking all our funds (and available borrowings) into one large mortgage it may make more sense to buy a couple of cheaper investments across different suburbs or different asset classes and therefore spread the risk.
3. Liquifying our assets on retirement. If we’re living in our most expensive asset, it can be emotionally difficult to have to move out of it in order to access the equity upon retirement. By choosing to rent we can potentially downsize when we reach retirement without having to sell assets which may not be in our best financial interest to realise the gains from that point in time.
4. Rent can be cheaper. In some suburbs, particularly if there are a glut of apartments being built, renting can sometimes be cheaper than the cost of owning the apartment. In that case, while you may emotionally want to own your own home, it simply makes more sense to not purchase an asset where there is an oversupply and potentially a smaller chance of capital growth.
5. Freedom to move. If we truly say we want freedom and options – the ability to have a sabbatical, for one parent only to work full time, to send our kids to private school, donate our time to charity or travel regularly – then committing to a large mortgage is potentially going to rob us of that. Instead, by choosing to rent and instead invest in a rental property you still have an asset class that is bricks and mortar but you may have the ability to upsize or downsize your rental accommodation according to your other life goals.

Home ownership is still viewed in our country as something that all Australians should and in fact must aspire to. And for some of us when we do the maths it can still make great financial sense. However, I do believe the mood is changing, particularly as the size of mortgages in some suburbs and capital cities increases to seven figures. Instead, with a bit of creativity and certainly the courage to swim against the tide, you may find that home ownership simply isn’t the right fit for you, allowing you to look for bricks and mortar in investments other than the home you might possibly live in.

The most important thing to realise, is that there are many paths you can financially walk down and this may be an option you hadn’t considered. Comparison services such as comparethemarket.com.au can also put you in touch with a broker to help answer any questions you have about the home loan process or home ownership in general.

The stockmarket

It’s fair to say most Australians feel far more comfortable investing in property or cash rather than shares. That’s despite most of us having a considerable exposure to shares via our superannuation accounts.

I believe that has a lot to do with the short-term volatility of shares, despite them generally performing similarly to property in the long term. Or perhaps it’s because we can touch and drive past our properties. They’re tangible versus the perceived mystical quality of shares. Or perhaps it’s because buying shares feels like gambling. We don’t really understand them so it feels like a roll of the dice.

The thing is, we’re already exposed to shares because of our super funds so it makes sense to at least have some understanding of the stock market. Plus, it’s much cheaper to access the stock market than a property because you don’t need a large deposit so it’s worth considering investing outside super as well. Or maybe think of it this way. My dad once said to me, it’s better to own the bank than to keep your cash in the bank and for the most part he would have been right. That’s because particularly in a time of lower interest rates I can receive 1-2% interest by keeping my money in the bank. But if I purchased bank shares instead (and owned the bank), I might be receiving capital growth (my shares increasing in price) and an income stream by way of a dividend payment.

There’s also the imputation credit that’s attached to the dividend which means tax has already been paid on this income up to 30c, unlike the interest in your bank account for which no tax has been paid. Finally, if you choose not to receive the dividend as cash, you can reinvest it using something called a Dividend Reinvestment Plan (DRP) which can be a great idea. That’s because you may not notice the small amounts you receive every six months so choosing to not receive the cash but having them purchase more shares in that company instead can be a smart financial move. By not receiving cash for the dividend but buying more shares automatically instead, the compounding nature of those regular purchases can be a great way of incidentally building an asset.

Direct shares

This is where you own shares in a company listed on the stockmarket yourself So for example you own shares directly in BHP, Telstra, Commonwealth Bank or others.

Managed funds

Also known as ‘active investing’. This is where a fund manager trades daily on behalf of the owners of the fund of which there could be tens or hundreds of thousands of owners. You don’t directly own any shares or asset classes yourself, instead you own ‘units’ in the fund.

ETFs (Exchange Traded Funds)

Also known as ‘passive investing’. This is where the ETF holds assets in a basket of stocks such as the Top 200 Shares in the ASX (Australian Stock Exchange) or the Top 300 Shares in the ASX or other commodity or share classes. Again, you don’t directly own any shares or asset classes yourself, instead you own ‘units’ or ‘shares’ in the ETF.

ETFs (Exchange Traded Funds)

Perhaps the easiest thing to get your head around when investing in the stockmarket is that there are three main ways that you can invest. The simplest way is you owning the shares yourself however if you’re not sure quite what you’d pick you might consider either a Managed Fund or an ETF (Exchange Traded Fund) instead. I’ve broken up the pros and cons for each below.

Superannuation and retirement

Of course, most of us are already investing in the stock market through our super funds but that doesn’t mean you simply want to set and forget them. When it comes to superannuation and retirement there’s three main things to consider:

1. What fund should I be using? Employers must give their employees the option of super choice which means it’s up to you how you invest. This might be via an industry fund which has lower fees, an ethical fund which won’t invest in fossil fuels and tobacco, a standard fund of which there are countless options or even a Self Managed Superannuation Fund (SMSF) for the more sophisticated investor who wants more control over their super funds. Also, notice I said what fund and not multiple funds? So many Australians have multiple funds so a quick way to save money is to jump onto Mygov and roll over your funds into one.
2. What’s your risk profile? Once you’ve chosen the type of fund, it’s important to choose your risk profile within the fund. This includes growth, balanced, conservative, high growth or cash. Your profile will depend on your reasonable expected returns and your accepted level of risk. For example, if you’re in your twenties you might be comfortable with an aggressive risk profile but you might be looking at a more balanced profile if you were retired.
3. How much will you contribute? Yes, there is a statutory amount of 9.5% that your employer must contribute but should you be contributing extra and from what age? There’s also the question of if you’re not being mandated to contribute to super because say you’re a sole trader, is this a good idea to do anyway? Concessional contributions are capped at $25,000 per year which simply means the total of your employer and salary sacrificed contributions (or those you want to receive a tax deduction for) cannot be more than $25,000. For low earners there is the government co-contribution where you can receive an additional up to $500 from the government to your super fund if you contribute up to $1,000.

Perhaps the easiest way of deciding how much extra you need to contribute is to look at how much you need in funds for when you retire. There are so many different free online calculators to work out how much you need. As a general rule, the younger you start contributing, thanks to the power of compound interest, the smaller the amount you need to contribute to end up with the same amount in retirement.