Hello SB brains trust, I am after your humble opinion!

I started my first job out of university as a mechanical engineer doing fifo in and out of the Pilbara. Whilst I have been doing my best to spend my money on new kites and holidays I’ve managed to put some of it into the bank, approx 40k so far. Given the declining interest rates at the banks I'm looking elsewhere to invest it but I'm not sure what is a better option is in the current economy.

Property is overpriced and I'm not interested in paying a mortgage for 20years, I'd much rather stay mobile as I'm interested in travelling for work (and settling down who knows where and when). Shares might be an option but I'm not sure what approach to take (long term investments or short term trading?). What else is out there? (Other than investing in Stabber Kites Inc or tin foil hats).

I'm currently back living with the rents in Perth and have no hex debt. My investment goal would be to take higher returns than what is offered by the banks on savings accounts. Perhaps plain old fixed deposits might be an option??

Cheers!

David

Yeah,.. but don't tell them that you're a kiter or they will set you up with all their ugly sisters.

Don't take advice from the internet. Go see a reputable financial adviser

I'm with Boofta. Check out a company called Australian Foundation Investment Company and others of it's type.

Buying a share in AFI Co is like buying the ASX50. Your 40k will buy you diversity, which will minimise the variability of dividends. Afi co is a boring stodgy unexciting option.

A shareholding in one co only, makes tax time easier and cheaper.

Oh as someone said, don't take financial advice from the internet or taxi drivers.

Google "Barefoot Investor", simple independant investment advice. Based around long term buy and hold share investment, wish I had started this when I was younger.

22yo & you already have $40k to 'play with'?...(b@stard!)

If you don't need/want to see it for a decade or 2 - go with a good fixed deposit from a guaranteed bank. Otherwise if you have all the toys you need, the time to play with them (I'm beginning to dislike you more as I type this), and a safe income for the next few years - I got nuthin' - never been in that situation myself!

Good on you for putting in the hard-yards at a young age, make sure you get good advice & keep enough coin to have some fun whilst you're young though.

Darkspi said..

spookyluke
Tax is ya big killer in shares, on your 5600 your actually only up 3900 roughly .Our budding engineer friend here would more then likely be in the higher tax margins again at 37 cents in the dollar .Being of the younger age group you should be looking at the long play because he has plenty of time to make/let it grow property is no less risk then shares but it does allow you much greater leverage and should be more tax effective. Useing a PAYG withholding tax variation helps reduce the weekly out lay to only a few dollars $50 - or +

leverage property 40k = 90% lvr = 400k property investment @7% return = $28k per year after 5 years you buy 1 or 2 more properties

leverage shares 40k 70% = 68k investment @20% return = $13.6k per year.

both are investments think of them as such both need a longer term approach to appreciate the full value

Death and taxes the TAX man will get you before and after death does

not to mention the high possibility of a margin call if you are leveraging into shares

My first investment would be in some financial education. Barefoot investor is great. Noel Whittaker is boring but very sensible. Leave Robert Kiyosaki (Rich Dad, poor Dad) on the shelf.

Figure out your own risk profile and likely investment duration then decide what suits you.

I prefer shares - you can buy any amount, no need to get a mortgage and can diversify quite well within them. Also quite liquid - if you need the money you can sell your shares and have the money in your account within a week although obviously you will then lose the (probably over-rated) ability to time the market. A mix of big companies like the banks, big retailers, mining stocks, health stocks should give you a combination of decent capital growth plus income as dividends which can / should be used to build your share portfolio. Be aware of capital gains tax - basically you pay your marginal rate on half of your capital gains. If you're likely to ever have a year of low earnings it's a good time avoid CGT but only IF all other indicators say sell (ie you have something better to do with the money). To some degree you need to be aware of but not worried by market fluctuations, you're young so shouldn't be too concerned if todays value of a particular stock drops as long as the fundamentals are still good.

Property is the other big one but you'll have to borrow money for it and will be stuck either managing the property yourself or dealing with real estate agents. If you negative gear it's a great way of avoiding tax but you're then relying on capital gains which are far less consistent than a selling agent will tell you. I've seen a few people get burnt quite badly by bad tenants so am quite wary personally, but then loads of people have had great luck with property.

Managed funds are good if you're lazy or a bit dumb. Mostly the management fees eat up your profits and they're not a whole lot 'safer' than the share market as a whole. Index funds are a halfway point between picking your own shares and managed funds.

"Modern Portfolio Theory"

Background

Modern portfolio theory has it's genesis in the work of Harry M Markowitz*. Markowitz attempted to quantify a conventional wisdom, that an investor should not place all their eggs in one basket.

Modern portfolio theory demonstrates how 'variability of returns' can be reduced through diversification.

Anyone privileged enough to receive a University education in the field of finance, will be steeped in modern portfolio theory.

Modern portfolio theory is the raison d'etre behind the funds management industry.

Assertions

Fund managers often claim diversification will reduce risk.
Modern portfolio theory contends 'variability of returns' can be minimised by diversification.

Moving forward

Risk and variability of returns are not the same.
Investment objectives of 'preservation of capital' and reducing 'volatility of income' are not the same.

Markowitz

Markowitz contended some portfolio's were 'efficient' and others 'inefficient'.

An inefficient portfolio is one with excessive variability in returns, for a given performance threshold. An efficient portfolio is one in which variability of returns is minimised, for a given performance threshold.

Markowitz demonstrated the concept of efficiency, using simplified mathematical models.

Practically speaking

This author contends Markowitz's models are impractical for the following reasons;

-Collation of data sets required for Markowitz's methodology, is logistically impractical.
-Data sets required are not readily available in the public domain.
-Commercially available data sets are prohibitively expensive, and require considerable labour in application.
-Markowitz combined mathematical concepts such as mean, standard deviation, correlation coefficient and ??????????????? probability.
-Markowitz's model requires the user to exercise judgement as to likely stock performance. Model outcomes are heavily influenced by user judgement.
-Are you a proven performer in footy tipping contests, limited to eighteen teams?

Rear view mirror

Harry Markowitz was a successful academic, widely published in journals such as 'Naval Logistics Quarterly'. Markowitz never made a living allocating capital among alternative assets, he enjoyed the luxury of a steady University salary. While his contribution to the field of funds management is undoubted, his work should be viewed from the perspective of those with a long term track record, in capital management.

Other names worth investigating include;

- Warren Buffet
- Benjamin Graham
- Peter Lynch
- John Templeton

* Markowitz, H. Portfolio Selection: Efficient Diversification of Investments,
John Wiley & Sons, New York, 1959.

Okay some riskier stocks atm: LYC, PDN, MBN, SWE, SHE, ERA, CZN. IMHO Paladin and Lynas are great buying at their current price.
Some bio stocks that are really looking like goingf places: NEU, AHZ (although you may ahve missed the boat on this one as it's gone crazy ove rthe past fortnight)
Remember though do your own research - having a balanced portfolio of blue chip boring stocks that give some decent dividends and then some of the above risky stocks that make investing just that little bit more exciting.
Oh, Commsec or any e trading site only charge around $20 - $30 per trade compared to Stock broker fees based on a percentage of the trade.

Try an LIC. (Listed investment company)

You buy them on the share market, and they give you exposure to a strategic mix of shares. Think of them as a managed share fund, but with a much lower % fee.

Milton is one, ARGO is another. There are a few others.

The 'www.intelligentinvestor.com.au' site is an interesting source of advice (and investment products). Did a paper trial on the Rivkin report for a while and never made a cent.

www.cromwell.com.au/home

Be wary of investment advisors, they are a lot of scammers like storm financial, they tend to give you advice which gives them the best comission.

Harrow said..

Little Jon said..

Be wary of investment advisors, they are a lot of scammers like storm financial, they tend to give you advice which gives them the best comission.

I remember a few a years ago I accepted an invitation to a free personal financial planning session from the bank I had my accounts at. (One of the Big 4.) I decided to go along, and some kid who was so young he must have been wagging school told me to borrow $250K against my house and invest in a share fund (the bank's of course). Over the next two years the market dropped to less than half it's value.

I didn't follow his advice, but I hope he feels bad for all the people who did.

A big benefit for consumers is the new legislation commencing 1.7.13 that bans commissions on investment products, and percentage based payments on leveraged (borrowing) strategies. But with the banks owning more of the Financial Planning force each year, and a chunk of the available investment platforms being owned by the big 4, it is a lucrative pot of money to chase for them.

A good Financial Planner can be invaluable in helping to define your goals and invest accordingly....but there are planners, and there are planners. If you are going to use a Financial Planner:

*ask around who your friends or family use, and why they are happy with them. That is a good starting point.

*shop around, ask the planner what their investment philosophy is......if they look at you blankly walk out the door. A good Planner should be able to clearly articulate their investment style and beliefs, and illustrate quite clearly why they invest that way. You need to be able to communicate with this person, and understand WTF they are talking about. If they dont have the communication skills that allow you to understand their strategies, thoughts or reasoning, walk out the door.

*find out their background. Been planning for how long, what is their eduction.

*seek out an independent Financial Planner where possible. That way you will get no asset/product bias, and more than likely a more appropriate strategy/asset. NAB owns MLC, Westpac owns BT, CBA owns Colonial etc etc - you go to those institutions you will be sold those assets....no brainer. In saying that, I have met some really talented bank Planners

* your planner should be eating their own cooking.......meaning they should be investing alongside their clients. My core share portfolio is the same as my clients - I change it in mine, I change it in theirs. Don't be afraid to ask to see your potential adviser's portfolio, or proof that they themselves are successful investors, or at the very least that they are following their own advice. I have been asked this by individuals (becoming clients) on several occasions about my financial position and investments and am not offended by this.....mind you some may be.......

*get several opinions - usually you will test drive several cars before you make up your mind, test drive a few advisers - initial and second meetings should cost you zero - it is your money, you have to be comfortable. If you are not being told enough information, or are being told that you need to commit and pay $$ before you know more.........walk out the door....

There are good teachers, lawyers, mechanics and administrators (etc), and some really lousy ones, and it is the same with Financial Planners, but please don't write us all off.

Oh yeah, I also meant to say well done on the saving and forethought. I will be a proud man if my kids have the financial responsibility that you show.