Investment lessons to be learnt

Bruce Brammall, The West Australian, 30 July, 2018

We’re a bit of a laughing stock, aren’t we? Some 10 years after the GFC and our little first world country’s stock market is still underwater.

How embarrassment. Pathetic. The ASX/200 peaked around 6828 points and we’re still sitting around 6250 – still about 8.5 per cent shy of that pre-GFC record.

Should we be ashamed to show our heads in public? Well, no, we’re Aussies. And dammit, we’re pretty good at everything.

Including paying dividends. Every year, Australia is at, or near, the top of the global table when it comes to paying out dividends.

This is a good thing and a bad thing. It’s great to get the income, but we might spend it.

If you had reinvested those dividends straight back into your investments, then despite the GFC, your share-based investments would be up more than 50 per cent since the GFC.

And it actually gets even better for some.

If you had reinvested the franking credits – the tax credits associated with franked dividends – then your 2007 investment would have nearly doubled. (Franking credits have been a particular benefit for low-income earners, super funds and pension funds.)

There’s a lesson in that. Obviously. Actually, there are dozens, but I’m going to focus on just five.

First: investing is a lifelong, yearly or monthly, habit.

Only one in a squillion people strike it rich from a single, one-off, investment. So, your chances of being one of them are, let’s say, remote. (And buying lotto tickets does NOT qualify as an investment.)

The most successful regular investors are those that start investing their money young and add to their investments every year.

It might be as simple as having a monthly contribution to an investment portfolio, or salary sacrificing into super (particularly as you approach retirement).

For others, it might be bigger and more complex, such as buying an investment property every few years, while also building a portfolio of equities.

Go down to the library. Borrow the investment classic “The Richest Man in Babylon” by George S Clason. Spend a few hours reading it. It will all become crystal clear.

Second: The easiest benefits from investing come from the power of compounding. Each year, your investment growing on itself. Initially, a 10 per cent return on $100 is $10. Later on, a 10 per cent return on $200 is $20.

Or the property that you bought back in the late 90s for $100,000 that is worth $500,000 now and, if markets move 10 per cent this year, will stack on another $50,000 this year (or half your initial investment).

Third: Reinvestment.

Where you can, reinvest the income from your investment. If you’re receiving distributions or dividends, and you don’t need the income to meet living expenses, put it back into your investment portfolio.

Income returns from many investments can average 3 to 6 per cent. Reinvesting that income will add up quickly. Well, by quickly in investment terms, I mean a decade or so.

This is how your superannuation works. Your super fund not only receives contribution income from your employer, but it also receives, and reinvests, the income paid from its investments.

And this is how those invested at the peak of the market in 2007 have seen their investments grow by 50 or 100 per cent since, despite the crash.

Fourth: Make it automatic.

If you’re going to invest on a regular basis, set it up so it’s automatic and not up to you to make the decision. Set up a direct debit to transfer the money, every month, directly into your investment. It’s far more likely to happen.

Again, this is how your super works its miracles. Your employer’s contributions arrive without you thinking about it and are automatically invested, as is the income your fund generates.

Become the “automatic investor”. Take the pressure off yourself having to make a decision each month.

Fifth: It’s not rocket science. You don’t have to be an investing genius.

If you don’t feel comfortable picking your own investments, you’ve got two options. Get a financial adviser to help you to understand and invest in markets. Or, buy an index fund, preferably one that meets your risk profile (you’ll find free risk profiles online) with a spread of investments.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial advisor and mortgage broker. E: bruce@brucebrammallfinancial.com.au.