Investing your hard-earned cash
Mining can be a great income earner for families (let's face it, there have to be some pay-offs for living beyond the black stump, or coping with a FIFO miner!) But there's a huge difference between earning good coin and investing it wisely. To get you on track, Mining Family Matters has enlisted the help of a seriously nice chap called Bryen Guy, Senior Financial Adviser with Carrington Financial Services in Adelaide. Here he offers some words of wisdom on investing your hard-earned cash.
Q: Are any investments better than others at minimising tax liability? What would you recommend in this respect?
A: Tax implications of investments can vary greatly. It can be as simple as having the investment held in the correct entity (e.g. lower income earner or family trust if applicable). Individual assets like cash, property or shares all create different tax outcomes. Minimising tax on investments should be included as part of an overall financial plan.
Q: How much does global volatility impact on the stock market and personal investments back in Australia? What should investors expect in this respect?
A: Global share markets have become much more accessible and efficiency of trading is much improved. This tends to create a closer correlation between overseas markets and the Australian share market. Factors impacting global markets (e.g. political unrest or natural disasters) will also have a direct impact on our markets. We would expect globalisation to increase even more going forward.
Q: We hear lots about the strong Australian dollar impacting on resources prices. Does it have any impact on personal investments?
A: Globalisation also affects currency, positively and negatively. If the Australian dollar is high, our products become less attractive to overseas purchasers. This has been highlighted recently with the obvious pressure on local manufacturing, especially of motor vehicles. Personal investments, typically shares in Australian companies, will be directly impacted if those companies are looking to buy or sell overseas. Hence share prices will also be directly affected positively or negatively.
Q: What advice would you give to first-time investors?
A: Don’t be rushed into anything and do your homework. Don’t forget, if it sounds too good to be true it usually is.
Q: For people interested in stocks, would you recommend they invest online without first speaking with a stock broker?
A: NO! There are common mistakes that can be made and opportunities you may miss when you go it alone. You should ask yourself:
- Are your shares diversified?
- Are your investments diversified across asset classes?
- Have you considered all your investments together as a portfolio?
- Do you know what level of risk is associated with your portfolio?
- Are you comfortable with the level of risk in your investments?
- Are your investments compatible with how long you will be invested?
- Do you know how your investments are performing?
- Have you considered your insurance needs?
- Are you taking advantage of dollar cost averaging?
- Are you taking advantage of gearing?
- Are you making use of tax concessions?
- Do you have a financial plan?
- Is your financial plan current?
Q: Should families build up a minimum amount before they start investing?
A: An ideal long-term investment strategy is "dollar cost averaging". The principle is investing regular, affordable amounts of money to average the purchase price of investment assets over a chosen time frame. This can be commenced with a small amount (e.g. $1000 and $100/month).
Q: Is there a strategy that delivers consistent, safe results for families seeking financial security?
A: You shouldn't put all your eggs in one basket. The right asset allocation will vary from person to person and is dependent on your personal circumstances and investment goals. The three most important factors are:
1. How long do you have to invest? Will you need to access your funds in a few years or can you leave them invested for many years?
2. What returns do you want to achieve? Will you meet your investment goals if you only achieve a return of five per cent annually, or do you need investments that can provide eight per cent?
3. How much risk are you prepared to accept? Would you be comfortable if your portfolio could fall by up to five per cent over your investment time frame? What if, in any 12-month period, it could fall by more than 16 per cent?
Your personal tolerance to risk and volatility is an important consideration here. Two investors with the same investment goals and investment time frame can have different asset allocations and both may be appropriate simply because they have different tolerances to risk. Once you understand your personal circumstances, your aim should be to either:
- Determine the level of risk you are prepared to accept and seek to maximise the return on your portfolio; or
- Determine the return you would like to achieve and seek to minimise the risk required to achieve this return.
Q: In terms of planning for the future, how do financial advisers help individuals and families?
A: Financial advisers offer advice on a wide range of financial topics. They will show you how to:
- Set realistic goals and take steps to achieve them
- Assess your current financial health by examining your assets, liabilities, income, insurance, taxes and investments
- Decide on what type and level of insurance you need
- Save for your future goals (i.e. house renovations, children’s education, reducing your debt)
- Plan and save for retirement
- Build an estate to leave to your family
- Save and invest in smart ways to reduce your tax
- Put your financial plan into action and review its progress
Q: What are the main differences between leaving your money in the bank and putting it into, say, the stock market or property?
A: Shares and property investments are considered to be potentially higher risk investments as there is greater possibility of capital loss than in cash. Most investors will invest in shares and property where they have an investment timeframe greater than seven years and have a desire to be exposed to potentially growth assets, albeit with a greater level of volatility than cash or term deposit investments.
Q: What information should people seek when looking to enlist a financial adviser? Should people shop around?
A: Start by requesting a copy of their "Financial Services Guide" (FSG). This document should provide you with most of the information you require. For example:
- What experience/background do they have?
- What are their qualifications?
- Who are they licensed with?
- What services do they offer?
- What sort of clients do they deal with?
- Will they be the only person working with you?
- How will you pay them for their services?
- How much will they charge for their services?
Talk to others (i.e. family, friends and colleagues) about who they use. Check the Financial Planning Association of Australia online directory for members in your area. (www.fpa.asn.au) All FPA members are committed to a code of ethics and high professional standards. Look for a professional "Certified Financial Planner". CFP professionals have gone beyond the competency, ethics and professional standards required of other FPA members. And finally, yes, shop around – be wary of people who call themselves financial planners, but who appear more interested in pushing a specific financial product at the expense of your personal goals and objectives.
Q: What particular elements should you look for in an adviser? (size of the company, price etc?)
A: You'll hopefully have a long-term relationship with your financial adviser, so make sure you feel comfortable with them. Ensure they give you plenty of opportunity to ask questions, and that they explain things in terms that you can understand. Look for an adviser who listens to you and treats your circumstances in an individual manner.
Q: Have we missed anything?
A: The key is, ask lots of questions and don’t commit to anything until you are completely comfortable with the decision.