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INVESTMENTS
Insights into Successful Investing - "Time is on your side"
Get rich quick schemes are everywhere. It was noticed that a flyer was handed out last week guaranteeing 30-50% return on your investment. Unfortunately these schemes tend to make their promoters rich quickly - often at the expense of investors. Like most things in life that are worthwhile, investing takes time. Time to grow (compounding) and time to recover from downturns (volatility).
Compounding - Albert Einstein is said to have called it the most powerful force in the universe, and John D Rockefeller named it the eighth wonder of the world. We call in compound interest. Why do people regard compound interest so highly? Most of us studied compound interest at school, so we know how it works. But it is not until you start looking at practical examples that you realise how powerful it can be.
Imagine you are 21 again. You decide to invest $5,000 and then add to it at the rate of $1,000 a year - until you turn 30. Then you stop saving altogether and leave your nest egg alone until you turn 65. Let's assume you earn a return of 8% pa (after fees and taxes) which you reinvest. For simplicity lets say inflation is zero (so your real return is a healthy 8%).
Now imagine an alternative scenario - in this version you don't start saving until you turn 31. At 31, you put aside $5,000 and add another $1,000 each year until you turn 65. Remember, you are reinvesting income, inflation is zero and you're getting that 8% pa average return.
You figure you will more than make up for the lost time by saving harder - i.e. for 35 years rather than 10 years. Which is the better strategy? The ten-year savings plan, in which you will have invested a mere $14,000 (a $5,000 initial contribution and then $1,000 for nine years) will reap $332,413. The 35-year plan, in which you will have invested $39,000 - nearly 3 times as much - earns you considerably less: $227,077. This shows the dramatic effect that compound interest can have on your savings - it's not how much you invest, it's how long you invest.
Insights Into Successful Investing - Volatility
Time heals all wounds. It's a common saying but one that's very powerful in an investment context. Often it's the investments that have the greatest risk of losing money over the short-term that produce the best return over the long-term.
Consider international shares. Over the 20 years to 31 December 2004, international shares have lost money in five individual years. But over the full 20 years, the average annual return from international shares has been almost 14% (based on calendar year returns of the MSCI World ex Australia accumulation index denominated in Australian dollars).
That's why many professional investors use the adage: "It's time in the market, not timing the market that matters". By investing for the long-term, the effect of short-term losses is neutralised. Timing the market means second-guessing; choosing the best time to buy and sell investments. This is extremely difficult. Many professional investors believe the risks of trying to second guess market movements outweigh the benefits.
A smarter, simpler approach is what is known as "dollar cost averaging". With dollar cost averaging, you don't have to focus on where share prices or economies are headed. You simply invest in a set amount on a regular basis over a long period of time. By doing so, you buy less when the market is up, and more when it is down - automatically.
Example: Say you put $100 per month into a managed fund that initially had a unit price of $10. Over the next few months, the market falls (causing the unit price to drop) before recovering to its original value. At the end of the five months you have 65 units each worth $10, so you have $650. You have invested $500, so your profit is $150 even though the unit price is the same as when you first invested. Of course, dollar cost averaging does not guarantee a profit. But it can smooth out the market's ups and downs and help reduce the risks associated with investing in volatile markets.
Summary
Buying property whether locally or overseas can be financially rewarding. It must be emphasised that investors needs to do their homework to limit any potential future risks. Finally, investors must ensure that the property represent good value and not just good looks. If these basic principals are understood then building a property portfolio will help investors create wealth for their future.
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