Top 10 Investment Principles for Affluent Families

At Absolute Wealth Advisers, we have been managing money for high-net-worth clients for over 18 years. During this time, we have distilled our top 10 investment principles. Not all of them are unique, but when combined, they become very powerful.

Principle Number 1 - Keep it Simple

“Unless you are an investment professional or an avid investment aficionado, life is busy and complex enough. You shouldn’t spend time and money investing in complex things that are hard to understand. There is very little that is truly ‘new’ in finance. Investing the majority of your money in simple, good old-fashioned investments that are easy to understand and provide solid returns is hard to beat.”

What This Means 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 avoid losing money—and sleep—is to stick to simple, tried-and-tested investment strategies that have stood the test of time.

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. It can prevent you from losing money if you have to sell an investment in a down market. Cash also allows you to seize market opportunities when they arise. The value of cash lies not in its return (which is low) but in what it enables you to do.

Term Deposits versus Bonds

Term deposits issued by banks are straightforward. You give the bank $100, and they pay you the stated interest, returning the $100 at the end of the term. Their value doesn’t fluctuate with interest rates or equity markets. In contrast, bonds—term deposits issued by governments or corporations—are more complex. They are repriced daily, and their value rises and falls as market interest rates change. Currently, bonds are riskier than term deposits, but they still play a role in diversified portfolios, often rising when equity markets fall. We will discuss the importance of resisting the urge to hold fewer defensive assets (cash, term deposits, and bonds) when returns are low in upcoming articles.

Diversified Index Funds versus Active Funds

Diversified index funds provide access to a wide range of Australian and international bonds and shares. They are low-cost and require minimal administration while delivering consistently high returns compared to actively managed investments. They also offer a reliable income stream, especially now, given the low rates on term deposits and bonds. If held long-term—where there’s no need to sell for living expenses—these funds are simple and very hard to beat.

Residential Property: A Good Investment?

Many Australians own their homes, but far fewer own investment properties. Investing in residential property can yield solid returns, but it’s essential to approach it with your eyes wide open.

Entry costs are high—typically around 5% when including legal fees and stamp duty. Income can be low, often between 2.5% and 3.5% of the property value. Additionally, properties can be vacant at times, leading to no rental income and leasing costs. Ongoing expenses can be significant, including rental agent fees, rates, strata fees, maintenance costs, and land tax. Exit costs can also be high, typically around 2.5% for advertising, legal fees, and agent fees.

Moreover, the cost of interest on a loan can mean that the property ends up costing you money (negative gearing). You can’t just sell a small portion of a property if you need access to capital.

Investment properties often require time and skill to find and purchase a good one, along with ongoing management, particularly regarding tenant and maintenance issues. If you enjoy the experience and challenge of investing in residential property, that’s great. Just be cautious, as it’s not for everyone.

The Risks of Complex Investments

Most complex investments are marketed by professionals who profit from selling them to you. However, the chances of you making money are low due to high fees and complexities involved. Almost all of these investments do not pass my “so-what” test, meaning the benefits to my clients are not high enough to justify the complexities and risks.

For most of our clients, we recommend sticking to simple, tried-and-tested strategies. This approach grants them peace of mind, allowing them to spend as much time as possible with family or engaging in activities they love, rather than worrying about their money or financial future.

Want to Feel Confident About Your Financial Future?

At Absolute Wealth Advisers, we help you optimise, grow, protect, and share wealth with purpose. This way, you can live well today and leave a lasting legacy tomorrow.

For more guidance on how to protect your wealth with confidence, book a chat with our team.

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