Whether the thought of investing daunts you or excites you, there’s a few key ingredients you’ll need to ensure your investment portfolio gets the attention it deserves. Being a savvy investor involves more than just purchasing a rental property and sitting on it (although that’s a good start). The key to successful investing is to build a strong, diverse and suitable portfolio. Sharon Le Bherz, Financial Planner for Heritage Bank shares her top tips for getting your investment portfolio into shape.
Start by listing your short term goals, followed by your long term goals. Do up a budget to help you visualise and see how your income is currently being spent, and how much you could make available to growing your wealth.
Then, book in a time with a finance professional to discuss these goals and look at all your options. A professional not only has an objective view on your finances but can help you to coordinate a plan to steer you in the direction of your short and long term goals.
There are some great tools on ASIC’s MoneySmart website to help get you started, including a budget planning calculator.
While evidence suggests assets with greater risk produce greater returns over the long term, you may not feel these joys in the short term. Whether you’re putting your kids through school, want to enjoy a holiday away each year or are saving for a dream house, you will need to sit down and look at your commitments and priorities to find out your capacity to survive a variation of investment returns.
Strategies to help reduce investment risk, while enjoying high returns include:
You’ve probably heard of this saying time and time again. However, your investment portfolio is really where this saying needs to be taken seriously. It’s important to spread your investment portfolio over a number of different asset classes – cash, fixed interest, shares and property. Within these asset classes, there are many sectors which allow further diversification.
A diverse portfolio is a fundamental strategy to successful wealth creation. People who keep a diverse portfolio of investments experience enhanced security of that portfolio and the consistency of long-term performance, without unduly reducing overall returns. Some people find diversification does in fact enhance their overall returns.
Your circumstances, needs and tax situation will directly affect how this balance is achieved. There are two types of investments which will be the basis for achieving this balance – income-producing and capital growth. While income producing investments generally offer high capital security, the returns are taxable and provide no additional growth potential to maintain purchasing power.
Income-producing investments include:
Capital growth investments rely on an increase in the capital value of the asset purchased. Investments can be made directly (for example, real estate), or indirectly through a managed investment vehicle. Investments include:
Capital growth is subject to capital gains tax, which is much lower than comparable income tax. By diversifying across sectors other than fixed interest, it’s possible to take advantage of favourable investment conditions which provide superior growth over the medium to long term. You may find capital growth investments enable better management of your taxation position to suit your circumstances.
Many Australian companies issue franked dividends. From a taxation perspective, investors who receive a franked dividend are assessed on the dividend received However, they will be entitled to claim a tax offset (a franking credit) for the underlying takes already paid by the company. These credits can be used to reduce tax payable on other income.
Today’s investment environment is as dynamic as ever. Changes in tax rules, the economy, your own income and expenditure requirements and investment markets mean your portfolio will need to have the flexibility to be altered depending on the current economic climate of your situation.
What else should you consider?
Sharon Le Bherz is a qualified Financial Planner at Heritage Bank. With 30 years experience in the financial industry Sharon feels privileged to use her experience and knowledge to help her clients reach their financial goals through sound financial advice. Her flare for finance was discovered at the age of 18 when she began work at a local bank. After much negotiation Sharon found herself paying board to her parents, equal to a quarter of her salary. Knowing her parents didn’t necessarily need the rent, but also weren’t avid savers, Sharon set up a separate savings account – where she deposited the $50 board a fortnight. Five years later, Sharon used that money to pay for her entire wedding – without any stress or hardship for her parents.