Lesson #1 of our Top 10 Investment Principles



At Absolute Wealth Advisers, we have been managing money for high net wealth clients for over 13 years and over that time have distilled our top 10 Investment Principles. Not all of them are unique but when combined they are very powerful.


For anyone who wants to see all 10 principles now, click http://www.absolute.sydney/our-investment-philosophy. However, over the next few weeks I will provide a little more detail on each one.


Principal Number 1 - Keep it Simple.


“Unless you are an investment professional or avid investment aficionado life is busy and complex enough without spending time and money investing in complex things that are hard to understand. There is also very little which is truly “new” in finance, so investing the majority of your money in simple, good old fashioned investments which are easy to understand and provide solid returns is very hard to beat.”


So what does this mean in practice.


Warren Buffett’s first rule of investing is “never lose money”. His second rule is “never forget rule number 1”. The best way to not lose money and sleep, is to stick to the simple, tried and tested investment strategies which have stood the test of time.


These include:

1. The value of cash – cash is what we spend on day-to-day expenses and one-off large purchases. Having access to cash when you need it creates peace of mind and can prevent you from losing money in the event you have to sell an investment in a down market. Cash also allows you to take advantage of market opportunities when they arise. The value of cash is not in its return (which is low) but in what it allows you to do.


2. Term Deposits versus Bonds – term deposits issued by banks are simple. Give the bank $100 they pay you the stated interest and the $100 back at the end of the term. Their value does not go up and down with interest rates or equity markets. Bonds (term deposits issued by government or corporates) are more complex. They are repriced (like shares) on a daily basis and their value goes up and down as market interest rates move. At the current low interest rates, bonds are more risky than term deposits but still have a role to play in diversified portfolios as they often rise when equity markets fall. We will talk more about the importance of resisting the urge to hold less Defensive Assets (Cash, Term Deposits and Bonds) when returns are low (as they are now) in upcoming articles.


3. Diversified Index Funds versus active funds – diversified index funds provide access to a range of highly diversified Australian and International bonds and shares. They are low cost and require little administration but provide consistently high returns relative to comparable actively managed investments. They also provide a consistently high level of income, especially now relative to low term deposit and bond rates. If held for the long term (where there is no need to sell to provide extra funds for living expenses) they are simple and very hard to beat.


4. Residential property can be a good investment but is not for everyone – many Australians will own their home but far fewer will own an investment property. Investing in residential property can be a good investment and has provided solid returns for many investors, but you need to go in with your eye’s open.


For example, entry costs are high (typically 5% including legal fees and stamp duty), income can be low (2.5% - 3.5% of the property value), the property can be vacant (no rent for a period plus leasing costs), ongoing costs can be high (rental agents fees, rates, strata fees, maintenance costs and land tax) and exit costs can be high (typically 2.5% including advertising, legal fees and agent’s fees). Add to this the cost of interest on a loan and often the property costs you money (negative gearing). Also, you can’t just sell a small amount of a property if you need access to some capital.


Finally, investment properties often require time and skill to find and purchase a good one and then time to manage, especially tenant and maintenance issues. So, if you like the experience and challenge of investing in residential property, all well and good, but be careful what you wish for as its not for everyone.


Most investments which are more complex are being marketed by investment professionals who are guaranteed to make money by selling it to you, but the chances of you making money are low due to the high fees and complexities involved. Almost all of them do not pass my “so-what” test, i.e. is the benefit to my clients high enough for the complexities and risks involved.


So, for most of our clients, we recommend sticking to the simple, tried and tested strategies. This means they have peace of mind and can spend as much time as possible with their family or doing things they really love and not worrying about their money or their financial future.


@Paul Barrett of Absolute Wealth Advisers is one of Australia's most experienced Private Wealth Managers. He is a financial expert in high net wealth divorce, estate management and inheritance. Contact him here

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