Investments & Savings

Set your financial goals
 
Investing and saving is an ideal way to help you achieve your financial goals. However there is no ‘one-size-fits-all’ solution, as everyone has different desires, requirements and personal circumstances. Therefore, it is important to develop your own personal strategy (or strategies) that take into account your:

- financial goals 
- investment time-frame 
- your risk tolerance.

For every financial goal you will need to determine the amount of money you will need and how long it will take for you to reach that goal. It can help by dividing your goals into short, medium and long-term objectives; which will help you choose the right investment to reach each goal.

For your short-term goals it may be better to stick with lower-risk investment options, such as term deposits or savings accounts. For long-term goals investments with higher returns may be better, such as property and shares. 

You will then need to review your financial situation by sorting out what you owe and what you own, as well as your income and expenses, to determine how much you have available to put aside as savings or to allocate to investments.

Investment Options

There are two broad categories when it comes to investments; defensive and growth.
 

• Defensive investments: 

Defensive investing is aimed at preserving the amount you initially invested, so they tend to be in investments that are less volatile and have lower risks.

Defensive investments focus on providing stable and consistent earnings, even during economic downturns, but with little movement in the capital invested. 

Common examples of defensive investments include:

- interest-generating savings accounts and fixed-interest accounts such as term deposits
- government bonds, corporate bonds, debentures and capital notes; providing a steady rate of income and diversity in a portfolio
- shares in well-established and high-quality companies that tend to stay stable whether the market is buoyant or not (such as the consumer staples, utilities and healthcare sectors)
- mutual funds and exchange-traded funds (ETFs) that invest in companies in industries that are considered to be ‘recession-proof’. 

Average returns over last 10 years for defensive investments has been 3 to 4% per annum. 

A defensive investment strategy involves regularly rebalancing your investment portfolio and diversification across different industry sectors.
 

• Growth investments

Growth investing is aimed at increasing the amount you initially invested, so they tend to be in investments that are more volatile and have greater risks. 

Growth investments focus on providing higher earnings returns, increasing the investor's capital, from investments that are expected to increase at an above-average rate compared to their industry sector or the overall market. Often growth investments have little or no dividends, as surplus profits are usually re-invested back into growth-plans. 

Common examples of growth investments include:

- shares that offer capital growth, such as newly established companies or small businesses that have potential to grow (such as start-ups, technology stocks, scientific and pharmaceutical investments)
- under-valued investments where earnings are expected to accelerate or grow at a faster rate than the market average
- property developments, such as residential and commercial property, used to earn a steady rate of income (rent) and capital growth where the buy-price plus capital improvements will realise a higher value the amounts spent
- high-risk, high-reward speculative investments, including cryptocurrency, 

Average returns over last 10 years for growth investments in property and shares have been around 6.5% per annum; however this can dramatically fluctuate over short periods. 

A growth investment strategy involves style investing in companies that exhibit signs that they will achieve above-average growth and currently a levels below their intrinsic or future value.

Selecting the right investment
 
In selecting the right investment for you, factors to consider include:
 

• How the returns are generated and the expected rate of return
• The risks involved
• Fees and charges associated with buying, holding and selling the investment
• How long you need to invest, to achieve the expected rate of return
• Tax implications of the investment
• Whether it meets your personal investment strategy and financial goals

Savings

Savings normally refers to the practice of putting money aside, which may not be readily accessible, so that it accumulates over a period of time. A regular savings plan is the key to any wealth creation.

Understanding how much you are able to set aside each week is the first step in your investment journey and is something many people struggle with. Importantly, once you have a savings plan in place, you need to start thinking about what you are going to do with those savings to start building some wealth for your future.

A savings plan often involves accumulating funds and regular contributions over time, to achieve a financial goal. A savings plan could be for purpose of:
 

• achieving a specific goal; such as a deposit on a house, a holiday, to buy a car, for retirement, etc., or
• putting money put aside for unexpected costs or potential emergencies. 

The advantage of a savings plan include the setting of a goal, or target, to aim for plus motivation to continue saving as you watch your money grow.

Some suggestions for savings include:
 

• Setting a goal and making that goal a priority
• Putting aside a percentage of your salary
• Sticking to a budget on expenses

Compounding Interest

Compounding interest may be the single most powerful tool you can take advantage of with your savings.

Compounding interest, when talking about investing, is when interest is paid on your principal (the original sum of money invested) and then interest is also paid on the interest you have earned; i.e. it compounds.

Here is a simple example of how compounding works: 
 

• If you invest $10,000 today with 8% interest paid each year, you will make $800 in interest at the end of the first year, to provide you with $10,800 in principal plus interest at the end of the first year.  
• If you invest the $10,800 for the following 12 months at 8% interest you will make $864 interest in the second year, to provide you with $11,664 in principal plus interest at the end of Year-2. 
• If you invest the $11,664 for the following 12 months at 8% interest you will make around $933 interest in the third year, to provide you with $12,597 in principal plus interest at the end of Year-3. 
• Through compounding, your money will continue to accumulate at this rate through compounding for as long as it is invested, generating $11,589 in interest over 10 years, to provide you with $21,589 in principal plus interest at the at the end of Year-10. 

Each year that the investment grows, the more interest it will accumulate, through compounding. However the key to compounding interest is to have a regular savings and investment plan. So if we were to apply the above example but, instead of just investing $10,000 and leaving it there, if we added a further investment of $10,000 each year from your savings then the compounding affect would be: 
 

• $10,000 invested today at 8% annual interest, to make $10,800 in principal interest at the end of the first year plus, to which was added a further $10,000 in savings. 
• $20,800 invested for the following 12 months at 8% interest you will make $1,664 interest in the second year, to provide you with $22,464 in principal plus interest at the end of Year-2. 
• After adding a further $10,000 in savings at the beginning of the third year and invested $32,464 for the following 12 months at 8% interest you will make $2,597 in interest to provide you with $35,061 in principal plus interest at the end of Year-3. 
• By adding $10,000 each year, your money will continue to accumulate to $156,455 at the end of Year-10, generating $56,455 in compounded interest over 10 years. (If this investment plan continued over 20 years, your accumulated interest and principal would be approaching $500,000 at the end of Year-20, generating $294,229 in compounded interest.) 

The key to increasing the value of savings and investments with compounding interest is time, so the earlier you can start saving the better your outcome will be. 

Budgets

A budget is the simplest and most effective method used to take control of your finances. In basic terms, a budget is used to measure your income against your outgoings to determine whether you have a balanced budget, a surplus budget or a deficit budget.

The most important thing about setting up a budget is to be realistic and set goals you know you're going to stick to. The frequency of your outgoings will not always be the same so it is important for your budget to measure the most common intervals; such as weekly, fortnightly, monthly, quarterly and annually. Most of your outgoings can be calculated fairly accurately into of these frequencies.

A budget doesn't need to be perfect and you may not stick to it 100% of the time, however small improvements over time can have a big results. Your budget should be written, reviewed and updated.

It is also important to make sure that you keep yourself accountable. To do this, you should go back and check what you actually spent to the amount that you had included in your budget.

Risk

When you invest you make a choice about what to do with your financial assets. However, all investments involve risk.

Risk is the uncertainty that the value of your investments can drop or not meet your expectations. Investors normally expect higher returns from investments that have higher risks. It is essential that you know the risks associated with your investment strategy. 

Understand your risk tolerance

When making investments it is important to know your ‘risk profile’; which is your willingness and ability to take risks. Your risk tolerance is your ability to endure the risk of losing the amount you invested; your capital. Factors that can affect your risk tolerance include your age, your current financial situation and capacity to recover from financial loss, your financial goals and your health. 

In making appropriate decisions about your investments it is important to understand what type of investor you are; which includes how much risk you are prepared to take when investing your money. It is therefore important for you to understand your risk tolerance to help you find investments that are aligned with it.

A further consideration is how long you are prepared to wait, to achieve the returns you are expecting. Generally speaking, if you have 7 years or more years until you need to access the funds you are investing, then you are considered a long-term investor. Long-term investors are typically more focused on growing their capital and therefore tend to invest in a higher proportion of growth assets, such as shares.

If the money you are investing is likely to be accessed within a few years, your main goal should be preserving your capital. This includes preserving it against erosion through inflation and usually means investing in low risk options and receiving a lower return.

Age is an important factor in risk tolerance. For example, if you are in your mid-20s, unmarried and have very few financial responsibilities then you would probably be more risk-tolerant compared to someone in their mid-50s, married with children at school and have a mortgage.

In addition to your own risk tolerance, every investment has different risks and returns; which include: 
 

• how readily you can get their money when you need it, 
• how fast your money will grow,
• how safe will your money will be when it is invested. 

It is important to monitor your investment portfolio on a regular basis; even if you are a long-term investor. 

Ways to reduce risk

There are a number of investment strategies that can be applied to reduce risk. Some of these are listed below.
 

• Asset Allocation Strategy: which is investing in more than one asset class to reduce risks; such as property, shares and bonds. An asset allocation strategy is to invest in a combination of asset classes that are inversely correlated to each other; so that if one asset class is underperforming it can be offset by another asset class that is outperforming. 
• Diversification Strategy: which is holding a number of investments within each asset class; such as shares in a range of industries and sectors, or investing in large, middle or small-cap equities. Allocating investments across various industries and businesses aims to minimise losses by investing in different areas that would each react differently to the same event.
• ‘Time-in-the-Market’ vs ‘Timing-the-Market’ Strategy: which is staying in the market for a longer period of time so that small corrections will not have as great an impact and reduce your overall risk, compared to trying to pick the best times to buy-in and sell to make quick profits. 

When investing, it is always a good strategy to carry out your own due diligence before investing in any type of investment. For example, have a look at the past history or performance of the investment, although this isn’t always an indication of the returns in the future. If you are considering purchasing shares, have a look at key ratios such as the debt-equity ratio, the price-to-earnings ratio, current assets to current liabilities, etc., to get an idea of how the company will perform. 

It is important to review your investments regularly to ensure they remain relevant to your objectives and they’re performing as expected.

The Right Investment Strategy

Strategies to make sure that you are on the right track towards achieving your financial goals, include:
 

• Having a strict budget that includes automatic deposits into your savings and investment accounts.
• Regularly monitoring your savings and investment portfolios to make sure you are meeting your financial goals. 
• Maintaining your investment strategy, ignoring daily fluctuations or pessimistic predictions, sticking to your core principles. 
• Minimising your financial risk through careful asset allocation and diversification.

General Advice Warning
The above information may be regarded as general advice. It may not suit your personal objectives and your individual financial situation has not been taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice provided as part of this information, having regard to your own objectives, financial situation and needs.