About Investing

In this newsletter we are looking at two questions:

1. are you investing to live or to die?
2. why invest and what are the dangers?

Most of us spend 15 - 20 years on education for forty years of working life, but we spend virtually no time on preparing ourselves for the twenty-five years afterwards.

There is a way to prepare ourselves that really works and it also makes our working life easier and more harmonious.

Read on to see how.
As always you are very welcome to contact me with any questions or comments.

Best wishes,
Christoph Schnelle
Adv Dip.FS (FP) EPA Acc Level 2
SMSF Specialist Advisor

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Are you Investing to Live or Investing to Die?

“I want to be able to retire and never work again. For that I need a lot of money, therefore I invest”.

Most conversations I have as a financial adviser are based on the above ideal and its many variations. There is a lot wrong with such an ideal and it causes a large amount of discomfort and pain.

Firstly, investing to have enough to never work again causes fear. Most of those who are young or middle aged are afraid they won’t have enough money. Ironically, those who do have enough money are often just as afraid of losing that money. Even more tragic is that even those who know they have enough for the rest of their life and are not afraid for themselves anymore usually are very afraid for their children.

Secondly, your body calibrates itself. If you have an aim to retire at a given age, be it 40, 50, 55, 60 or 65, your body accepts that and lives accordingly. By the time you retire, you may be sure you won’t work again because your body can’t work again. An obvious example is police officers: they join the force in their late teens and early twenties and retire 30 years later on a full pension. I have been told that these retirees in their late 40s and early 50s have a life expectancy of under 10 years!

Thirdly the above ideal means you may not look at your work too closely – you only work to get you to retirement and most people never do what they love and never love what they do as their work.

Investing therefore is supposed to ensure a carefree retirement and there is a lot of pressure on it to perform.

There is another way.

It is possible to take the pressure off investing and to take the fear out of the future and to give yourself a much better chance to stay healthy into old age – all at once.

When you invest, have financial freedom as your aim. Financial freedom is the ability to choose whether to work or not, where to work and for how much to work. This can happen at any age and then financial freedom is just a particularly nice way station in life.

If you realise that you may still work when you are in your 70s whether for money or not - perhaps because you enjoy it and have something to share and you therefore may never really retire - then your body is less likely to fall apart at an earlier stage and a lot of the fear of the future disappears.

Your best asset in retirement is the richness of your heart.

Your next best asset in retirement is the health of your body.

Your financial wealth comes third. Financial wealth is very important but it cannot make up for the first two.

Therefore if you sort out the first two in your life, there will be a lot less pressure on the third - money. That has a lot of beneficial consequences.

The biggest benefit is that you see money for what it is, no more and no less. You are able to make financial decisions with far fewer emotions and you can have a lot more fun. The biggest killer of investment returns I have found is emotions.

If there is fear of the future in you – and such fear is in almost all of us – then we are much easier prey for those who promise us future security and safety. The more promises you get when you invest, the more likely you are to lose your money. Therefore, the more promises you NEED when investing, the more likely you are not to do so well with your investments.

* * *

Why do we invest money?

We invest money to get more money back in the future. This is obvious but we all seem to forget this simple point at times. Those times can be expensive.

I encounter the following two questions a lot:

• What is the biggest danger?
• How can we do well?

What is the biggest danger?

The biggest enemy of investing is emotions.

If I am emotional when investing then I am in reaction to something from the past, i.e. I am angry or sad or regretful or enthusiastic or afraid, especially of the future. This means I cannot clearly see what I am doing now – it is as if there is a blurring film between myself and reality.

How can we do well?

We can do well investing our money by understanding the trade-offs of various investments and then choosing the ones that suit us most.

The main investment categories are property, shares, bonds and cash.

Cash

The big advantage of cash in the bank is that you only lose it if the bank goes broke and the government won’t step in. That is very unlikely. At the moment cash at bank also provides quite high interest rates and we can use term deposits to get even higher rates.

The big danger with cash is that we get greedy and try to earn an extra 1, 2 or 3 percent per year above those rates. Greed is an emotion and there are many people waiting for us to give them our money. Instead of 6% they promise 9% a year. Some of these people will even keep their promise of high interest rates for a while. In general though, if you want higher than market returns with certainty, you are asking for the impossible. If you persist, your money is in danger.

Bonds

A bond is an investment category that comes with two promises: If you give me money and I give you a bond, then I promise you that:

• I will give you interest on your money for the duration of the bond, and
• I will give you your money back when the bond expires.

Bonds can have a duration from one day to 50 years. Common periods are between six months and ten years and you can buy and sell bonds during their lifetime.

Most bonds are issued by governments (Australian Government Bonds) and businesses (Westpac bonds). Bonds sometimes lose money while cash virtually never does. As a result an investor in bonds expects a higher return than an investor in cash.

Shares

If you buy a share of a company like Westpac, there are no promises whatsoever. You are a part owner of the company but you will only get any money from the company (dividends) if the company makes a profit and if the company decides to share that profit with you.

Shares are much more volatile than bonds and cash. As compensation an investor expects a higher long term return from shares than from bonds and cash and accepts that at times they can lose a part of their investment.

Property

If you buy a residential or commercial property you are also investing your money but the rules are quite different. Your own knowledge and effort will make a big difference here. If you are ready to invest a lot of time and work it can be very well rewarded.

Another big advantage of property for those earning an income is that it is the easiest practical way to save money. It is much harder to put money aside every week or month than to pay extra into a mortgage even though both are forms of saving.

Which investment do I choose and how will I do well within my chosen category?

That depends on where you are at and what you want to achieve.

It is my pleasure to help you with this and to show you how you can do well within the category or categories that you choose.


Christoph Schnelle
Adv Dip.FS (FP) EPA Acc Level 2
SMSF Specialist Advisor


This message was sent by Christoph Schnelle of In Your Interest Financial Planning.
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