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Bruce Brammall, The Australian, 17 December, 2023
Dateline: Christmas party at a mate’s house. I knew the hosts and maybe two other guests. Everyone else I was meeting for the first time.
You just talk about “stuff” standing around a barbeque with strangers, don’t you? How someone knows the hosts, about their own kids, what they do for a crust.
I was asked about my kids’ ages. I said DebtBoy was 16 and DebtGirl was 15.
“Oh, they’re so cute at that age” said one couple in unison.
ARE … YOU … BARKING … MAD?!
What is “cute” about a 202cm (6’8”) son with a bad haircut and worse music taste and a 15-year-old daughter who, for months, has ONLY smiled at me when she needed something?
I just smiled. Said nothing.
The next couple pointed to their kids running around the yard, about 7- to 10-year-olds.
I thought to myself “oh, they’re so cute at that age”.
And the penny dropped. In a few years, I will probably will look back on my current teenage bundles of hormonal attitude – as the barking mad couple was – as “cute”.
Sprint or marathon?
Kids are a stage of life. Just like your own childhood, partying in your 20s, pre-kids, careers, post-kids and retirement.
Not all “stages” happen to everybody. And they don’t happen at the same age for those who choose those paths.
No-one gets a timeline with their life planned out. Some life stages are short. (Or circumstances shorten them.) Others run for decades.
Some are sprints, some middle distance, some marathons. Some are competitive. Others, you’re competing against yourself. Each requires different strategies.
Many people have never given any consideration to the fact that investing is no different.
Through life, and at most stages at every point in life, most people have multiple investment timeframes running concurrently.
No, I don’t!
Yes, you do. You just haven’t thought about it properly.
Quick example, before I come back to the main point. Most 30-somethings will have at least two, maybe three or four, of the following investment time frames going on.
They might be saving for a house, planning for kids’ education, starting to build an investment portfolio, and, of course, their superannuation.
Buying a house might be in the next few years, educating the kids a five to 15 year timeframe, an investment portfolio they have no idea how long that’s about, and superannuation, which they can’t even think about touching for roughly three decades.
Right there, in order, we have a short, probably a medium to long, possibly-short-but-maybe-long, and an ultra-long-term time frame.
Timeframes and risk
Why do you need to understand timeframes for investing?
In a word, “risk”.
Some investments have virtually no risk, but have little likelihood of a great return either. Others have significantly higher risk, but offer higher long-term returns.
If you had some money you knew you needed in about one to two years, would you risk that in the share market if there was a chance you could lose 20-50 per cent in that time?
Take the example I regularly get asked about.
A young couple have saved $100k for their first-home deposit. They want to save more and reckon they’ll buy in 12-18 months. “How do we best invest the money to get the best return until then?”
The answer is cash. And take whatever boring interest rate you can get on that until you need it.
Why? If you dump that into shares … would you be okay if your $100k turned into $60k in five weeks, as happened during the Corona-crash of February/March 2020?
Or would you rather it just grew by a bit with a boring interest rate, as you continued to add to it, over the following year or two?
Sure, you could invest in shares and possibly make 10 or 20 per cent (or more). But are you prepared to take that gamble? Take an almost certain gain with interest rates of 3-4 per cent, or risk losing 50 per cent?
Back to basics
Not going to focus on first-home buyers today.
Let’s get a quick understanding of what assets involve what risk and then move onto personal timeframes.
There are four main types of assets – cash, fixed interest, property and shares.
From a risk perspective, that’s the order, from low to high. There is very little risk with cash, which is money in a bank. Fixed interest is loans made to governments and companies, which carries a slightly higher risk.
And then there is property and shares. Both generally pay some income (rent, dividends and distributions). But their returns are more about the chosen assets hopefully increasing in value over time, which is inherently risky. Price moves can happen quite quickly, known as volatility. They come with higher risk, but, over time, generally reward investors with higher returns.
The message? If your money is being “invested” for the short term, you can’t really afford to take much risk. However, if you’re investing money for the long term, then it’s likely that more of it should be in shares and property.
Long-term thinker
Let’s take a couple around 50 as a baseline. They both work, have a couple of kids and they upgraded the home five years ago, which came with a bigger mortgage.
What are their various investment time frames?
Firstly, they’ve got some short-term time frames. They’ve got the kids at school (possibly private), they’ve got to save for Christmas and some holidays, meet the mortgage repayments and always have a little in reserve, just in case.
The money to cover that needs to be immediately accessible. Cash in a savings account, preferably in their offset or redraw account.
They also have superannuation. As they’re 50, they can’t touch their superannuation for at least 10, maybe 15 years, which is a reasonably long-term investment.
Super is forever
But many people misunderstand the time frame of superannuation. At age 50, sure, you can get hold of your super in 15 years. But that’s not how it’s supposed to work.
When you turn 65, your super is designed to be turned into an income stream (known as a pension), which can then pay you out, slowly, over another few decades. Until you die, if you’ve saved enough in your super.
So, most 50-year-olds with a super fund really have an investment time frame of about 30 or 40 years. That’s an ULTRA long-term time frame.
If investment returns, measured over decades, showed that shares and property beat fixed interest and cash, shouldn’t you have a bit more of your money sitting in those assets in your super? If your answer wasn’t yes, sorry, you were wrong.
Our couple are also on top of their home loan and have managed to build a reasonable level of savings, currently sitting against their home loan.
It’s currently more cash than they need. What do they do with that?
A load of options, obviously. One good option could be to put some into super, which is tax-effective. That locks the money away and they decide they might need some of it before they turn 65. Possibly to help the kids into their first home, or to pay for weddings, or a big holiday.
So, this timeframe is somewhere between, possibly, three and 10 years. They decide to treat is as a seven-year investment.
That’s still a reasonably long-term timeframe. It then becomes a question of how much of the savings, in excess of their “rainy day funds”, they should put towards growth assets, such as shares and property, via direct investments, ETFs or managed funds.
Absolutely, another option could be to continue to pay down the home loan and pay it off faster.
And they could do a bit of all three. Extra for the home loan, super and investment. There’s no right option for everyone.
Different walks
On either side of 50, the choices and timeframes obviously change.
Those within a few years of retirement will have different considerations and would generally be better off choosing super because of lower tax rates.
Those further out from retirement, say early 40s, probably have larger mortgages they’re struggling with and don’t want to lock too much money away in super until they’re 65. They’ve got different timeframes, which require different strategies.
Sprint, middle distance and marathon. You’re probably running all three at once, when you think about it, and that will likely mean developing different strategies to meet each of those timelines.
Bruce Brammall is both a financial adviser and mortgage broker and author of books including Debt Man Walking. E: bruce@brucebrammallfinancial.com.au.