Investing your financial freedom fund

Invest it!

Sounds easy doesn’t it.

This is where the hard work starts, and where we get controversial.

Remember, you have to beat tax and inflation. If tax takes (say) 50% of the return, and inflation is running at 3% per year, then you need to get a return of at least 6% or you go backwards.

Don’t worry about short term returns – quarter by quarter is meaningless. Year by year is nearly meaningless. You need to look at time periods of 5 to 10 years, and let the magic of compound interest work for you.

(As an aside – assume you can get 10% per year and ignore tax. Then after 10 years, compounding means for every $1 you start with you have 1.1^10 = $2.60. And 10% is a pretty lousy return. Aim higher. A lot higher.)

Real Estate & Houses

Some invest by buying rental property (the devotees of Jan Somers, and others). Personally, I don’t go much on this. It involves maintenance and tenants, and other nasty hands-on things. And over the last few years the capital gains have been good but the rental returns, lousy. The capital gains are likely to have a pause for about the next 5 years.

Those who want to flame me about my attitude to rental housing – don’t bother. If that’s what turns you on, then go for it. But, do your research… house prices cannot rise at faster than inflation forever. It stands to reason that nobody could afford to buy if that happened. Do your research, and you will find that house prices tend to go in cycles – roughly 10 years long, characterised by big rises for 2-3 years, followed by about 5-7 years of being pretty flat.

Personally, I don’t want to spend $200K to $350K a pop to buy houses that could take a long time to offload. And to start you need a lot of equity in your own home, or a lot of savings.

Managed Funds

There are plenty of these about, and more every week.

Watch out! Most managed funds are professionally managed by fund managers. I call them fund damagers because they always make money even when you don’t – most take a percentage of the funds under management, not a percentage of the gain they get you. A nice little earner if you are in the business.

Managed funds generally have a low cost of entry so you can tip your money in when you have only $1000, or maybe $2000 depending on the fund.

Most of them let you tip in regular extra contributions – great for set and forget.

If you put money into a managed fund, you want to aim for a return of at least 15% per annum averaged over a 10 year period. A cash or capital stable fund is secure but gives lousy returns. If you are young, take a few risks.

Most importantly, most managed funds charge an exit fee as well as an entry fee. So having chosen, stick with it. If you always chase the high performers you will lose through the fees you pay. Constantly moving from one fund to another is known as “churn”, and its another nice little earner for the fund managers.

Choose carefully, choose a few different funds, tip in regularly, and don’t worry too much about short term performance.

Never, ever, put all your money in one place or under one manager. There is safety in spreading it around a bit.

(A controversial point here: Diversity is sometimes known as “di-worsity”. The best investors in the world have consistently made superior returns through holding concentrated portfolios. However, these guys do this all day, every day. If you and I can’t manage that, then diversity will deliver worse returns than the best in world, but it also lowers risk. The choice is yours.)

Shares, bonds, and marketable securities

If you want to buy a few shares, make sure you do your research first. If you don’t know where to start, buy some books. Don’t just buy one book, buy 5 or 6. You need many points of view.

Treat trading schemes with suspicion. Treat technical analysis with suspicion. (Technical analysis is the business of looking at historical trends, plotting price charts, and reading the tea leaves).

Be careful of financial advisors, especially those that want to cream off some of your money by cute things like “rebalancing” your portfolio on a regular basis.

You can sign up with an Internet broker for nothing, and buying and selling is cheap. You can start investing with $500 if you want. I’d suggest waiting till you have about $1000 before getting going.

Don’t buy anything just because you know it. Buy because you understand it. Find out what companies do, who there management are, how they treat their employees. Find if their profits are consistent or up and down. Find if they pay a dividend. See if they look expensive of cheap. Think and look before investing. Remember – it’s your money!

If a company looks cheap – see if you can find why. Have they declared a profit warning? Are they in trouble? Maybe they really are overlooked and present a bargain. Maybe not.

If a company looks expensive – see if you can find out why. Are they a good consistent performer, where today’s poor dividend will be nice earner in 5 year? Or are they in the middle of dot-com style speculative lunacy?

Look at the poor performers, and find the names of the senior management. Remember them. See if they keep popping up. There are some companies I will never invest in because of who is in management and on the board. If I post those names here I’ll get sued for defamation – sorry – you will have to do your own research.

Never follow the herd. The herd are often like sheep – sticking together, running in the same direction, and never thinking for themselves.

This sounds hard. It is hard. But the cost of entry is low, and the potential returns are high. You need discipline, patience, confidence and research.

Finally – there is nothing like concentrating the mind by having real money on the line.

Listed Investment Companies

If everything above sounds too hard, or unattractive, look at the Listed Investment Companies.

There are at least two on the ASX that have been going for more than 50 years.

Both of those two have a highly diversified portfolio, pay reasonable dividends (and have been growing dividends for 50 years) and have very low management costs – typically less than 0.1 % of funds under management (no, that is not a misprint – and compare that with many managed funds that take 1% to 2%).

Watch out though – there are a few new generation listed investment companies that charge very large fees- just like managed funds.

For legal reasons I have to be careful giving out names of listed investment companies – it sounds like investment advice – but if you want to know who they are, prowl through some broking advice or (as a last resort) send me an email.

Some of these listed investment companies have been returning an average total return of 11% to 13%, on average, for the last 20 years. Some have returned slightly better.

Not bad for a complete set-and-forget, low-cost, no-thought, do nothing investment!

Obligatory legal disclaimer stuff The author does not have a financial services license and is not legally qualified to give financial advice. Readers should treat everything here as opinion. Readers should get qualified, independant financial advice (and treat it with suspicion).

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