A one-page introduction to investing
What are asset classes?
Essentially the broad name given to things you can ‘invest in’ – property; shares, which give you a fractional ownership of a company; bonds which are effectively ‘loans’ to companies or governments; then a whole range of things like gold, bitcoin [dumb], infrastructure, art, classic cars [!] and the list goes on.
‘Growth assets’ vs ‘safe assets’
In simple terms, property and shares are regarded as ‘growth’ assets – they ‘should’ grow faster than inflation – some do, some don’t. Over time, they have had very similar rates of growth BUT they can be volatile.
Bonds on the other hand have historically been regarded as ‘safe’ assets – returns will generally be lower but so will volatility. At times like this however, with all the geopolitical noise, Covid, Ukraine, China, nothing is particularly safe.
Know what it is
If you do not understand something, do not invest in it.
Time is your friend
At your age, you have time on your side. You can weather the ups and downs, you can stay invested through the down times, indeed that is always the best time to invest, and you can allow the ‘magic’ of compound interest to work for you. Take a long-term view with a well-constructed portfolio and you will be ok – 7-10% over 50 years is powerful.
Inflation is your enemy
Inflation ‘eats’ cash and spending power. It has been quiet for decades but now it's re-emerging. A cup of coffee that now costs you $4.50 will cost you $12 in 50 years if inflation rises at 2% per annum so the challenge is to have investments that increase faster than inflation – inflation + 4-5% is a good target.
Financial independence
Trust any government at your peril. There are two simple things you should aim for – to own your own home [lifestyle] and to be financially ‘independent’ [investment] in retirement. Tick both of those boxes and you will be ok.
Achieving the right balance
Rough guide – if your ‘lifestyle assets’ are approximately equal to your ‘investment assets’ at the point of retirement, that is not a bad balance. You cannot ‘eat’ your home. If you have investments around 20 times your cost of living, that is also not a bad target.
Superannuation
Super is not an ‘investment’ per se. It is a tax-advantaged structure that ‘holds’ investments. The trade-off is that you cannot access it until you are in your 60s. If you live with it day to day, you can manage it yourself. If not, a low cost professional manager is a better option.
Start your journey early
What we are doing here is but the start of a journey. By starting early and learning early, by going through cycles of euphoria and fear, you will learn. The challenge? To take responsibility for a future which is yours and yours alone.
First published on the Firstlinks Newsletter. A free subscription for nabtrade clients is available here.
Rob Garnsworthy is a retired former Managing Director of Norwich Union Australia. Analysis as at 24 August 2022. This information has been provided by Firstlinks, a publication of Morningstar Australasia (ABN: 95 090 665 544, AFSL 240892), for WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities, we), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances.