I’m often asked about what’s the best way for people to invest their hard earned dollars so they can have their money work for them. I’d love to say I’ve coached people to make their fortunes out of the stock market or property investments but that’s just not the case. Typically I get as far as asking what their end goal is for investing and never hearing back from them. So today I want to give everyone some ideas and a bit of a framework so that you can go out into the wild blue yonder of investing and make proper decisions about what you want to achieve.
After many long night shifts working at one of my last jobs I ended up stumbling across a few good sources of investment information. The forums are filled with hundreds of people who are either looking to invest or are already well on their way to their financial goals. I spent many of the long 12pm to 7am drag reading through all the articles and asking all sorts of silly questions until I finally came to the conclusion that I needed to approach this just like any other project. The first step is to scope out your requirements.
So what’s the end goal for investing? For myself it’s to build up an asset base that will eventually replace my income and will also give me a lot of leverage so I can maximise my return. A lot of the time people tell me “I just want to be rich” but what that lacks is a real end point where you can call success. I’ve seen people often get too frustrated at not seeing any results early on and giving up on the investing game completely, that’s why it’s important to know your goals and set milestones so you can track your progress.
Let’s take a generic example that’s based off what I want to achieve:
- Time frame: 5~10 years
- Risk profile: low to medium.
- Goal: passive income of approximately $150,000/year (in today’s dollars)
- Chosen investment vehicle: property for asset base, managed funds or high yield shares for revenue
So the first thing you need to decide is how long you want to be in the game before you achieve your goal as this affects what investment vehicle you should choose. Property is a medium to long term with shares, managed funds, etc are more geared to short to medium term investments. However there’s exceptions with both these rules so you can make a quick buck with property (usually done through “flipping“) and there are many shares which mimic property trends (bank stocks are a good example of this).
Once you’ve decided your investment term the next thing to decide is how much risk you’re willing to take on. Risk is a complicated term especially when it comes to managed funds as it doesn’t mean exactly what most people think it means. For example, a lot of revenue geared managed funds (basically high interest savings accounts) classify risk as the potential for them not to make the targeted yield, whereas risk in direct share purchases is more aptly described as the potential for the stock to lose its value. A general rule of thumb is investments like shares and managed funds are medium to high risk with property being in the low risk area. Again there are exceptions to these rules (as we’ve seen recently) but you can usually guage risk by the return or yield the investment offers. The higher the return, the more likely it’s a risky investment.
Now for the juicy part, where do you want to be at the end of all this? Do you want to replace your income so you don’t have to work? Are you building a nest egg for retirement? Do you have your eye on a Bugatti Veyron and can’t get the finance with your current assets? This is the idea that will drive you through your investment and will be the base of your financial plan.
So for someone like me who is risk adverse, in it for the long game and is looking to leverage as much as he can property was the best investment for me. Once I’ve got my asset base up I’ll be shuffling money into managed funds or similar to get my revenue up, as property is a great leverage tool but not the best for revenue generation. Depending on your situation many of the other options out there might be the best thing for you. So, as always, have a look around at the vast options and use the 3 basic ideas I’ve described here and you’ll be well on your way to financial freedom.
This post does not constitute financial advice and is provided as is with no guarantees, warranties or support. Seek professional advice from a registered financial advisor before undertaking any investment decision.