Financial Advice and Investment
Financial advice can help you set and achieve your financial goals while making the most out of every hard-earned dollar. By letting you feel more in control of your finances, you can protect your assets and avoid expensive mistakes. Financial advisors can also seek out any government assistance you may be entitled to.
Seeking out solid financial advice can make all the difference to your overall financial literacy. As thorough as we have tried to be in this series, our advice is not tailored to a specific situation. Financial advisors can sum up your situation and advise on the next steps you should take.
The following points will get you up to speed with some advice that financial advisors will provide for you. We hope that you can briefly read about them before you talk to someone about investing.
Investing is an excellent way supplement your income. By having a diverse portfolio, you can have a steady income from your shares that will last well into your retirement. Are you ready to invest? You will be if your debts are under control. You have enough cash for emergencies and you have adequate insurance protection.
Once you have decided you are going to invest, it’s time to look at your options. Consider it like a marriage. It is worth really getting to know a company before you invest. Assess that it is something you believe in and that works for you. Understand the product disclosure statement (PDS) and the product’s key features, fees, omissions, commissions, benefits and risks.
The most common type of investing is in buying shares. Shares are stocks, securities and equities and are a good way to build wealth over time. The most common way to buy and sell shares are on the share market using a broker or broking service. As mentioned before, buying into shares requires time, research and analysis to yield a true reward.
If you want to diversify your investments, investment managers can be relied upon to make decisions for you. As always, you need to be mindful of the fees and always read the PDS.
How managed funds work:
- Managed funds are ‘managed investment schemes’ run by a ‘fund manager’ or ‘responsible entity’
- Money is pooled together with other investors. A manager then buys/sells assets on your behalf
- You are paid income or ‘distributions’ periodically. The value of your asset will rise or fall the value of underlying assets
Managed funds can offer diversification in your portfolio and grant access to a broad range of assets or markets with a relatively small amount of cash. You can also make regular contributions, reduce your overall paperwork and make completing your tax return easier.
Some of the drawbacks from managed funds include higher fees than other investment types although these can vary widely. These investments may not allow you to convert to cash when you want to. You also lose control of your investing autonomy, relying on the skill of others.
Buying a rental property is a popular form of long-term investment and offer an avenue of investing that is easier to understand than most. As people, will always need somewhere to live, it can be a less risky form of investment, especially in regions of growth like South East Queensland.
However, in the capital cities like Sydney, Melbourne and to some extent Brisbane, many experts are suggesting that over the last 5-10 years a surge of property and rental prices coupled with large numbers of units being released has led uncertainty around the future of the apartment market specifically.
Property as a physical asset is less volatile compared to other investment markets. It also has a great potential for capital growth as housing prices increase over time. Property investment may provide you with an income from tenants as well as offering tax deductions for expenses and interest on loans.
However, the property can be costly if your rental income does not cover your mortgage repayments or other expenses. Rising interest rates can yield you a lower disposable income. If you don’t have a tenant in a property, you may have to cover costs until someone moves in. Properties are also inflexible, meaning you cannot simply sell off a bedroom to get access to some quick cash. High entry and exit costs can be expected (real estate, legal and stamp duty fees) and you may make a loss on your property if its value decreases.
The best place to buy an investment property is a market that you are familiar with – look for growth suburbs, high rental yield and low vacancy rates. Find out about changes in zoning and development that may affect prices. In a property itself, you want to appeal to as many people as possible. These include attractive features of second bathrooms, lockable garages and proximity to schools and shops, appeal for a variety of market segments (singles, young families, retirees) and low maintenance costs. Remember, units are easier to maintain than houses, but body corporate fees can sting.
Once again, diversification is important to your portfolio. Share investing, managed funds and property investment are still viable options for investing overseas. International investment also includes Forex, the buying and selling of foreign currency to speculate on price movements. Exchange traded funds can track the return of global markets, regional indices or specific asset classes in particular regions overseas.
Australia’s economy is the 13th largest in the world with a GDP of around $1.6 trillion, which only represents 1.7% of global economic output. Overseas investment offers greater scope for growth, more options and greater diversification.
The risk of looking overseas include risking money on unfamiliar markets including currency, and the factors of politics, economy and regulations that affect this risk. There are additional costs for investing overseas, as well as increased selling time. There may also be a lack of information about the investment you wish to make as well as less legal remedies if things go wrong.
Investments can be fraught with just as many scams as sectors of finance. Here are some of the ones to look out for:
- Investment seminars: charismatic, but ultimately unlicensed and inexperienced speakers can make promises of risk-free investment, easy routes to becoming a millionaire, above average returns and government-approved investments.
- Sports betting systems: gambling can be disguised as a legitimate investment opportunity. These scams will ask up to $15,000 up front. It is extremely high risk.
- Investment trading software: These programs can suggest you can make lots of money through active share trading. They cannot guarantee anything, in reality.
- Unexpected offers to buy your shares: investors may offer to buy your shares for much less than the current market price. They will use an official-looking letterhead or a similar name to a company you are investing in. Watch for lowball offers and requests to pay in instalments over time.
- Illegally managed schemes: it is generally illegal to offer units in a managed investment scheme unless it is registered with ASIC. Check that the scheme is registered, that the company is listed and has a license.
- Virtual currencies (bitcoin): digital money does not exist as a physical commodity. It is not recognised as legal tender but is accepted by a number of entities online, particularly criminal ones. These currencies have fewer safeguards and no statutory recourse to get your money back if it is stolen. Values can fluctuate wildly based on popularity.
- Land banking: an investment scheme offering the purchase of large blocks of land pre-development. Investors can be easily misled into thinking they have got a great opportunity. Rezoning and development need approval from local governments which may take years to get approved.
- Company-director fraud: Directors, CEOs and CFOS can take investors funds and use them for personal gain. Some of the warning signs include the company raising funds for no reason, no updates on research and development (R&D) activity, paying large consulting fees, unexplained and unusual expenses and loans asset sales or agreements with parties where there is no clear benefit.
Borrowing to Invest
‘Gearing’ or borrowing to invest can increase returns when markets are rising. However, losses can be devastating when markets fail. Gearing allows you to have more money to invest combining your own money with money you have borrowed. If you are on a high marginal tax rate there may be tax benefits. You are usually allowed a tax deduction for interest payments on the loan.
Borrowing to invest only makes sense in the investment return after taking is greater than the costs of the loan in interest and fees. If not, you are taking on a lot of risk for a low or negative investment. Interest rates on the loan may rise while your investment income can fall. You also risk defaulting if your income is hampered by sickness, injury or redundancy. If the value of the investment falls, proceeds from the sale of your investment may not cover the loan balance.
Borrowing to invest is a high-risk strategy for experienced investors. Ask yourself these questions if you think gearing is right for you:
- Do you have a secure income from other sources (salary) to top up loans if your return is marginal?
- Do you have a high marginal tax rate so you can reap the most from text benefits?
- Are you in it for the long haul? Gearing is generally a medium to long-term, 5 to 10-year strategy
- Is there flexibility in your strategy that allows for changes in your personal circumstances, such as raising children or having a sudden reduction in income?
- Will poor investment performance affect you emotionally? Will you be stressed? Will you lose sleep?
It is essential that you obtain independent financial advice when investing. Avoid investing in companies the advisor is linked to. Don’t just go solely off recommendations. Supplement what is given to you with your own rigorous research. As you progress with your investing and financial literacy, you may not need advice. For now, treat everything as a scam until you have fully ratified its worth.
Financial Advice/Counselling Services
- National Debt Helpline: Free hotline open from 9:30 am to 4:30 pm, Monday to Friday. Professional and financial counsellors offer free, independent and confidential service. They help with debt problems and give advice on how to resolve these problems. They can be contacted on 1800 007 007
- MoneySmart: Online search to connect you with financial counsellors near you
- Department of Human Services: Government department that offers free financial information service through seminars, personal appointments or over the phone on 132 300.
- Department of Social Services: offers Commonwealth Financial Counselling. You can have face-to-face meetings or call the national helpline on 1800 007 007
- Salvation Army Moneycare: provides free and confidential financial counselling. Moneycare can connect you with services near you
- St Vincent de Paul Society: Vinnies provides a one-on-one service for people seeking financial assistance. They can also be contacted on their local Helpline. In Brisbane, it’s 07 3010 1096
- Beyond Blue: provides 24/7 emotional support with a trained mental health professional. Call 1300 224 636
- Lifeline: offers a 24-hour crisis support service both online and over the phone on 13 11 14.
As mentioned at the start of this piece getting financial assistance specific to your situation tends to be a safer course of action as the actions taken are tailored to suit your individual needs. To click on the link to go back home, or click on the next link to see the previous blogs. If you need a No-interest-loan-scheme loan (NILS Loan) from us, just follow the link.