We personally think asset class funds are superior for most investors, but it depends for how long.
Avoid lazy money, put it out to work – for less than 3 years, put it in a bank account, but look for an account that will reward savers – some banks have them.
Will you get
government superannuation at age 65, or
indeed, at all
You can work your longer term savings harder
If we diversify widely into asset class funds across bonds, property, and shares for the medium to longer term, we are likely to get an extra 2% to 6% above bank rates.
$500 a month over 15 years* at bank rates of 3% net – $114,941
$500 a month over 15 years* in a balanced fund at say 6% net – $148,035
$500 a month over 15 years in a growth fund at say 9% net – $192,020
*Total Input $90,000
For 3 to 7 years – put it out to work in a conservative to balanced portfolio (probably the right place for emergency money too)
For 7 to 12 years – a balanced or growth portfolio would be appropriate
For 12 years or more – a growth portfolio will probably fit the bill
Automatic usually works better
The best way is via an automatic payment from your bank account direct to the investment, maybe on pay day, fortnightly or monthly. You will soon get used to the money being deducted from your account and will not miss it. Automatic savings succeeds.
From time to time I have met someone who says “no, I will put the money in when I have it, and I will because I am a good saver”, but they very rarely do.
“Money, if it does not bring you happiness, will at least help you be miserable in comfort”. – Helen Gurley Brown
Excuses, excuses, excuses
Waiting till things look better , I want to live today, who cares about retirement, I will just keep working, I’m too busy, I want certainty . The cost of delay is high – see below !
The magic of compound interest
$500 per month for 10 years - $60,000 input - at 5% nett return will grow to $79,041
$500 per month for 20 years -$120,000 input - at 5% nett return will grow to $208,316
$500 per month for 30 years - $180,000 input - at 5% nett return will grow to $418,565
Risk is reduced by Diversification
Asset class funds are spread across 500 bonds, 250 properties, and 5,000 shares. Whilst they go up and down from time to time, they are unlikely to go away.
Risk is also reduced by averaging in
When investing, and especially in shares, you don’t really know if they are a good buy or not, and you don’t know what the price will be tomorrow, next week, next month or next year. All you really know is markets have risen a lot more than they have fallen over the past 70 to 80 years.
By making payments monthly, sometimes you are getting in when markets are down and sometimes when they are up, but you can never get caught out buying all your investments at a market peak.
Rebalancing is another risk reduction strategy
You decide to have a portfolio that is 50% shares and 50% bonds. After a while shares rise so now your portfolio is 45% bonds and 55% shares. You take some of the profit off the shares and reinvest in the bonds bringing your (now larger) portfolio back to 50/50.
Sometimes shares can fall so your portfolio might become 55% bonds and 45% shares. In this case you take some money out of bonds and buy more shares, bringing the portfolio back to 50/50.
You cannot pick the top of a market , but this is the next best thing because you are either;
- selling on a rising market (taking profit when it is there)
- buying shares when they are cheaper
It’s pretty simple but it does take a bit of discipline. A lot of people freeze when markets are down and are reluctant to add more shares when things look gloomy, but we should “buy in gloom, and sell in boom”.
Desiderata says “exercise caution in business affairs because the world is full trickery. But let it not blind you to what virtue there is ; many people strive for high ideals ; and everywhere life is full of heroism”.
Trickery is out there, but so too is good advice - you just need to seek it out.
This article was supplied by Alan Clarke who is the author of a book entitled “Retire Richer” which is a practical guide for everyone age 25 to 85.
Alan also writes regular articles on www.acfs.co.nz
Alan is an authorised financial adviser (AFA) and his disclosure statement is available on request and free of charge.