Alan Kohler's Eureka Report Guide To Personal Investing

Alan Kohler, Barbara Drury

• Publisher: Melbourne University Press Digital
• Year: 2011
• ISBN:
  9780522860368
• Topic: Betriebswirtschaft
• Subtopic: Finanzwesen

Alan Kohler's Eureka Report Guide to Personal Investing provides the tools you need to understand all aspects of your personal finances. Written in plain language for the self-directed investor, it will help you seize control of the money accumulating in your superannuation, your home and, most importantly, in your investment accounts. Designed to be read either from cover-to-cover or dipped into as a key reference tool, this is a comprehensive guide to the basic building blocks of wealth creation.Tap into the resources of Australia's No. 1 Investment Report to learn the fundamentals of: goal setting, borrowing to invest, investment structures, the property market, tax planning, superannuation.Using this knowledge, along with your deeper understanding of risk, return and the major asset classes, will help you uncover the key principles for lifetime mastery of your personal finances.Alan Kohler's online investment website Eureka Report has become the leading personal investment publication in Australia. Alan Kohler's Eureka Report Guide to Personal Investing brings the very best principles and lessons we have learnt along the way into one easily accessed reference.

Part I

Look before You Leap

If there is one mistake that almost everyone makes at the start of their investing career, it is rushing into investments without having a goal or a plan to guide them. Before you know it, you have a jumble of investments and no clear idea if you are on the right track. At some point, most investors realise they need a plan.

Successful investors are like chess players who keep one eye on the endgame even as they make their first move, the endgame for investors being retirement. With that in mind, we decided that the best way to start a book about investing was by looking at The Big Picture. Before you get bogged down in the details of which stock or managed fund to buy, it is worth spending some time thinking about your long- and short-term goals and whether you have the financial resources to achieve them. In Chapter 1 we also cover personal investment styles, to give you a better chance of developing a plan of attack that suits your temperament and attitude to risk.

In Chapter 2 you will learn about the planning process and the pros and cons of seeking professional financial advice. We also introduce some of the investment structures, such as self-managed super funds and family trusts, that allow you to hold investments in the most tax-effective way.

Chapter 3 takes the planning process a step further, guiding you through the process of designing and building an investment portfolio. We explain how the right mix of investments can have a much bigger impact on your total return than the individual investments you select.

Chapter 1

The Big Picture

Life is full of personal and financial twists and turns, opportunities and challenges. One moment you are earning a great salary, perhaps starting a family and upgrading to your dream home, and the next moment your wealth takes a hit from a protracted illness, redundancy or divorce. Most people can expect more than one financial windfall in life, perhaps from an inheritance, a great investment, a job promotion or a bonus, and more than one financial loss, from a bad investment, a market crash or a business failure.

Success in investing, as in life, depends on making the most of your opportunities and reducing the risk of avoidable losses. But before you put your money to work, it is worth stepping back and observing The Big Picture. You might begin by making a clear-eyed assessment of your current and future financial needs, wants and circumstances. Next, take a look in the mirror. You need to be brutally honest with yourself to avoid setting goals you can’t possibly reach, or making investments that rob you of sleep. Finally, think about investing as a journey that will unfold over the course of your life, rather than something that must be set in stone from the outset.

Creating a solid financial foundation and building wealth is not glamorous but it can be extremely rewarding. The more thought and effort you invest in the task, and the sooner you get started, the more profitable it is likely to be.

The Long and the Short of It

Investors are faced with an avalanche of information, most of it focused on how to choose investments. We admit our own part in this financial information industry, which is generally well intentioned but lacking in one essential ingredient—the specific requirements of you, the investor.

Each investor is an individual who brings a different set of skills, preferences, financial goals and circumstances to the task of investing. Before you invest any of your hard-earned cash, you need to ask yourself some searching questions:

• What sort of life do you want to live? The more luxurious your lifestyle, the harder your investments need to work. You don’t need to be a high-income earner to create long-term wealth, but you will need a plan and the discipline to stick to it. Big spenders, even those on high incomes, need to put money aside to meet their investment goals or they risk squandering all their wealth on their lifestyle.

• What are your savings and investment goals? Your goals are likely to change as you progress through life but at any one time, you probably have a number of goals with different time horizons. Short-term goals of one to two years might include buying a new car, a holiday or reducing credit-card debt. Medium-term goals of two to five years might include saving for a home deposit, paying children’s school fees or more travel. Long-term goals typically include reducing a mortgage, building up an investment portfolio and saving for retirement. Short-term goals can be financed with employment income and ‘at call’ savings, while longer-term goals typically require investment in growth assets.

• How much risk can you tolerate? The answer to this question will help determine the investments you select. There is no point chasing high returns if you lose sleep every time your investments go down in price. If you crave stability and guaranteed returns, you need to adjust your expectations and asset allocation accordingly. Some people only discover their aversion to risk after a market crash. Others start out tentatively and cautiously only to discover that their appetite for risk increases along with their knowledge of investment markets. Age is also a factor. When you are young and have time on your side, you can afford to accept more risk in exchange for potentially higher returns. Once you retire and have less time to recover from market falls, you lose your appetite for risk.

• Where is your money coming from? The money you have available to fund your lifestyle and investments may come from several sources, all of which need to be taken into account and managed. Your main source of income is likely to be your job, but you also need to factor in employer-paid superannuation, investment income, the age pension and lump sums from the sale of a business, a redundancy or an inheritance.

The nature of your income may also have some bearing on the investments you choose. According to work done by Canadian academic and personal finance educator Moshe Milevsky, the amount of money you have in shares and high-risk investments in your peak earning years ought to depend on your profession.

The theory goes that public servants, academics and people with very certain future income should view it as bond-like. In other words, a job for life is like a government bond that pays guaranteed income year after year. Milevsky and his followers argue that people in such professions can afford to take more risks with their investments and should consider borrowing to increase their exposure to shares and growth assets. Investment bankers, business owners, executives with company shares and anyone whose income is uncertain or related to sharemarket performance are advised to have no more than 60 per cent of their money in shares.

What Sort of Investor Are You?

Investing isn’t all about dollars, numbers and projections. Success often comes down to intangible factors such as personality and attitude towards money.

Over the years we have observed professional money managers, personal investors, financial advisers, true believers in the merits of property over shares and equally zealous advocates of shares over property and have reached the conclusion that investors tend to fall into one of the following categories:

• The dabbler. The dabbler would like to be a good investor but lacks commitment and persistence. They invest a bit of money here and a bit of money there without a plan or a clear idea of their investment and lifestyle goals. Some dabblers end up muddling through while others lose money and confidence.

• The conservative investor. These investors value modest guaranteed returns over uncertain high returns. They keep their cash in term deposits and swear by property because you can touch it; you can drive past and keep an eye on it. Property investors have traditionally done well in Australia but the experience of overseas property markets during the global financial crisis disproved the popular belief that property never goes down in value. Successful property investors understand the market, the risks and the returns they need to achieve.

• The fighter pilot. These competitive solo flyers have supreme, often unfounded confidence in their superior investment skills and ability to beat the market. They rarely use professional advisers although they may seek out financial ‘gurus’ to learn the secrets of their success. They follow the market avidly and know a lot about price but nothing about value. They tend to zero in on the latest fad investment or hot stock and may do extremely well when markets are booming only to crash and burn when the boom is over. They have no investment plan and often end up with little to show for their activity.

• The delegator. The delegator is committed to investing but lacks either the time or the interest to manage their investments. Some delegators spread their money across a range of managed funds while others are happy to leave the details to their financial adviser. Success for this group depends almost entirely on the ability and integrity of their advisers and fund managers.

• The engaged investor. Engaged investors take a serious, planned approach to investing. Although they value professional advice, they also do their own research and work with advisers to formulate and carry out investment plans. Engaged investors invest directly alth...

Table of contents

• Contents
• Preface
• Independent Investor
• Part I: Look Before You Leap
• Chapter 1
• Chapter 2
• Chapter 3
• Part II: Weighing Up Risks and Returns
• Chapter 4
• Chapter 5
• Chapter 6
• Chapter 7
• Part III: How to Recognise a Class Asset
• Chapter 8
• Chapter 9
• Chapter 10
• Chapter 11
• Chapter 12
• Chapter 13
• Part IV: Many Happy Returns
• Chapter 14
• Chapter 15
• Chapter 16
• Chapter 17