The principles of sensible investing
Investing doesn’t need to be complicated, but it does need to be deliberate. Most good outcomes come from a few principles applied consistently, and most bad ones from ignoring them. This article is general information, not personal advice.
1. Get the foundations right first
Before investing, make sure you have:
- an emergency fund of three to six months’ expenses, so you’re never forced to sell investments at a bad time,
- high-interest debt such as credit cards and personal loans paid off, since no investment reliably beats a 20% interest rate, and
- adequate insurance, so an illness or accident doesn’t undo your plan.
2. Match the investment to the time frame
Money you need within a few years belongs somewhere stable, such as savings, term deposits or an offset account. Money you won’t need for seven years or more can be invested in growth assets like shares and property, which rise and fall in the short term but have historically grown over long periods.
3. Understand risk, and your own tolerance for it
Higher expected returns come with bigger swings in value. The right level of risk is the one that lets you reach your goals without panicking and selling when markets fall. Be honest about how you’d feel watching your investments drop 20% in a year, because at some point they will.
4. Diversify
Spread money across asset classes (shares, property, fixed interest, cash), across industries, and across countries. Diversification won’t stop losses, but it reduces the damage when one investment does badly. Having everything in one property, one company or one sector is a big bet.
5. Keep costs low
Fees compound just like returns. A 1% difference in annual fees can mean tens of thousands of dollars less over a working lifetime. Know what you’re paying in investment, platform and advice fees, and make sure you’re getting value for them.
6. Think about tax
- Super taxes earnings at up to 15%, and nil in retirement phase, but the money is locked away until preservation age.
- Outside super, earnings are taxed at your marginal rate, and gains held for more than 12 months get the 50% CGT discount.
- Franking credits on Australian shares can reduce tax, or be refunded.
- Whose name an investment is held in affects the tax, which is where an accountant helps.
See super basics for the contribution caps.
7. Be careful with borrowing
Borrowing to invest magnifies both gains and losses. Negative gearing can make it more affordable, but it doesn’t turn a bad investment into a good one. See negative gearing explained.
8. Stay the course
Trying to time markets rarely works. The investors who do best tend to invest regularly, stick to a plan, rebalance occasionally, and avoid reacting to headlines. Review your plan once or twice a year, or when your circumstances change, not every time the market moves.
9. Beware of anything that sounds too good
Guaranteed high returns, pressure to decide quickly, and unsolicited offers are hallmarks of scams. Check that anyone offering financial advice or products holds an Australian Financial Services Licence, on ASIC’s Moneysmart website.
Get personal advice
Judge Accountants doesn’t provide personal financial product advice. Clarity Wealth’s financial planners, who work in the same building, can build an investment plan around your goals, while we look after the tax and structures.