With Melbourne Cup fever in the air, it seems an appropriate time to discuss financial investments. Like putting money on a horse, investing can sometimes be a gamble. As long as you’re well-informed, though, you have a better chance of coming out ahead if you loan your money to a bank or corporation than if you wager it with a bookie.
Managing your own super fund
Managing your own superannuation investments rather than getting a large fund to do it is becoming increasingly popular. Just 10 years ago, self-managed super funds (SMSFs) controlled only 10 per cent of all super money. These days, the 470,000-odd Australian SMSFs control a third of the nation’s super money, which amounts to more than $415 billion of assets.
You can start a SMSF with as little as $50,000, but given the amount of work involved and the approximately $2000 a year you’ll be spending on accountant’s and broker’s fees, it only starts to become potentially worthwhile at the $200,000 mark. If you’re well organised, comfortable with paperwork and knowledgeable about investing (or willing to become knowledgeable), running your own super fund can be a fascinating and lucrative pastime. On the flip side, if you fail to sensibly invest your retirement funds, you will be living with the consequences for the rest of your life. Looking for more SMSF insights?
Whether you’re investing in order to fund your retirement or just to grow your wealth, you’ll have no shortage of places to put your money. Here are the risks and rewards associated with the most popular types of investments.
Shares or property?
This is an endlessly debated question among both part-time and professional investors. Before we explore it further, consider that if you still have money owing on your mortgage, it may be wise to pay that off before investing elsewhere. If you’re paying the bank 7 per cent interest, you’ll want to be confident that any money you invest rather than putting on the mortgage will be making you more than 7 per cent.
Shares historically outperform all asset classes, but the key word there is “historically”. If you don’t have time to recover from the effect of a GFC-type market downturn, you may wish to consider property.
At least in Australia, property is significantly less volatile than shares – the value of a unit or house may flatline or fall slightly, but it’s unlikely to halve overnight. That said, a poorly selected or managed investment property can turn into a money pit if expensive repairs are required or good tenants can’t be found.
While there’s a huge focus on the share or property markets, there are other worthwhile options. Investing in cash means handing over your cash to a financial institution by putting it in a term deposit or high interest savings account. With interest rates coming down, this isn’t as lucrative as it previously was, but it is still possible to earn interest well above the cash rate of 3.25 per cent (briefly, the cash rate is the interest rate financial institutions borrow and lend money at when dealing with each other). Term deposits and high interest savings accounts carry virtually zero risk while currently providing solid returns of around 4-5.5 per cent.
If you have the relevant expertise, it’s also possible to have fun and make money investing in art or collectables.
Whatever financial investment you’re considering, always weigh up its volatility, tax implications, liquidity and potential to end up costing you money against the return it promises. Seeking independent and professional advice is always recommended. And if you have a winning flutter on the Melbourne Cup consider saving the money soundly.