7 Rules For Financial Success

As reported in this month’s March Market Update, markets have continued to improve their recovery from the Global Financial Crisis (GFC) that began in mid-2007 with the American ‘sub-prime crisis’ when debt-laden American households began to default on their home loans in significant numbers.

It is therefore timely to consider what lessons we can learn from the GFC and try to avoid repeating mistakes in the future. In order to build an asset pool that if capable of resisting attacks from inflation, tax and recession, here are some points for you to consider:

1. Focus on protecting your assets from one poor decision
You can do this by diversifying your assets, rather than tying up all your assets into one investment property, for example, or investing most of your portfolio in a speculative mining company share. 

2. Have realistic aims
With the significant growth in share prices since March 2003 in Australia, and the large increases in Australian house prices since the mid-1990s, it is easy to have an unrealistic idea of what sort of growth you can achieve.  In the long-run, study after study suggests that houses broadly rise with inflation and average incomes – around 3-5% pa, and shares rise with the growth in profitability of businesses – around 8-10%pa. 

3. Avoid investing in things you don’t understand
Hype often leads to people following fads, most famously the ‘tech bubble’ that caused a lot of people to laugh at Warren Buffett, the well-known investor who avoided investing in tech-start up businesses as he didn’t understand how they could make money. If you don’t understand how something will drive an investment to succeed it is safer to invest in something else.

4. Buy quality assets at reasonable prices
It is too common to look at the recent past and buy something you think will go up in the next few months, rather than being more patient and focussing on buying assets that you can be confident will rise in value over the next decade.  This approach is far more boring but, unless you are very lucky, far more rewarding over time.

5. Reinvest investment income
Unless you are in the drawdown phase of your life, aim to use dividends and income payments to reinvest back into your portfolio, using the cash to minimise the need to sell investments when rebalancing your portfolio over time.  We generally recommend against dividend reinvestment plans for this reason, as what you might save on avoiding brokerage to top up holdings you may well lose when having so sell down more to rebalance your portfolio.

6. Beware debt
Be especially careful with non-deductible debt like credit cards, personal loans and home loans, but also with borrowing to invest too. All debt needs to be repaid in time, so when borrowing to invest, be clear how you will eventually repay the invest loan and remember that as asset values fluctuate, the level of debt remains constant until you repay it.  The root of the GFC was large amounts of debt.

7. Have fun and sleep well
It is not worth investing in something that causes you to lose sleep.  Ultimately, money is a means to an end, so focus on the outcomes you are seeking in your life and enjoy the journey. 

For help and guidance on building and managing your wealth, please feel free to contact our Partner – Wealth Consulting, Michael Rees-Evans CFP ® on 02 9299 7044, or visiting our Where do I start page and completing the online questionnaires.

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