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General Investment thoughts for every age
Friday, February 26th, 2010This is not advice of any kind but purely the personal opinions of Harry Pontikis – Director of Chocolate Money, regarding investments depending on age.
Teens
This is when education regarding money is paramount. Each teenager should have a mentor to guide them through the disciplines of making and spending money. To teach them the differences between good debt and bad debt, the dangers of credit card debt and debt traps in general. To be aware of responsible use of mobile phones, shopping and indiscriminate spending on throw away items like fashion and holidays.
Teaching teens the philosophies of responsible spending, paying off debts quickly and earning money through their efforts rather than allowances, will leave them in good stead to face later year responsibilities.
The Twenties
These are the early years when many people are relatively new to the workforce, still rent and are focused more on lifestyle, going out, going on holidays and exploring life and the world. While some have formed a permanent relationship, many don’t have children. Home ownership and family are still in the future.
For this group many don’t have a financial focus at all but if they do have one, the main financial focus is usually on saving a deposit for a home. This is an investment that has particular appeal due to its lifestyle benefits and capital gains tax-free status.
The first step for many will be to get their credit card debt under control and then eliminate it. Only then will they be in a position to start building wealth rather than simply paying for past lifestyle choices involving financially irresponsible consumption – but living life for the moment.
With interest rates having stabilized at relatively low levels but property prices getting ready for another ‘run’, this age group stands to gain by entering the home loan market immediately or alternatively, saving for a deposit for a home so as to be able to buy when the market is weak.
Their main challenge will be to decide whether or not to try to supercharge their savings growth by diverting funds into a regular savings plan that invests in equity funds. This decision rests purely on their risk profile – alternatively, depositing their savings into a high, interest yielding account like the ING Direct Saver which has no fees, charges or restrictions on its use would be the best solution.
The decision to buy a house as a couple or an individual, should be made once the deposit secures an easy entry into the desired property market and when the opportunity avails itself through a well priced home.
The Thirties
By their 30s, some people are in a permanent relationship, many have children and most have bought a home. The focus is usually on reducing their mortgage, possibly renovating and, where possible, attempting to upgrade to a better property.
People in this situation should consider taking out income insurance, especially given the increased tendency of companies to respond to setbacks by downsizing or moving their labour force offshore.
At the very least they should be careful not to over-extend themselves financially, instead keeping money available for emergencies, whilst focusing on pouring all disposable funds into the home loan.
This may result in delaying renovations. Alternatively, they should ensure their mortgage facility allows them to draw down more money quickly if they need funds in a hurry by making additional repayments into an offset facility or a leaving it in a redraw account.
Of course, some people in their 30s will still be both mortgage and family free. This group may decide to forge ahead as a result of not having any family commitments by aggressive investing. Examples are by using geared share funds, by taking out a margin loans to finance portfolios of direct share investments or by purchasing additional investment properties after the purchase of their owner occupied home.
The Forties
Your financial comfort in your 40s largely depends on how much spending restraint you showed during the previous decade. If you were reasonably disciplined, there is a good chance you will be able to upgrade to a bigger home or, alternatively, carry out the renovations you deferred in order to finance investments.
However, the 40s is sometimes a financially difficult time for people who have children since they are now costing more than ever, especially if they are at private schools. This group needs to budget carefully. In contrast, those with relatively high incomes, or with few or no family responsibilities, should have the capacity to continue to use gearing to expand their investment portfolio.
The alternative will be to divert more money into superannuation. Unfortunately, while very tax-effective, money invested in super is locked up until you satisfy the various preservation rules.
These mean you can’t get your super before you are at least 55 and also retired. Super savings really only equate to financial freedom for people who are already in their early 50s.
The Fifties
This is a time for more sustained wealth creation due to higher salaries and fewer family costs (many children by now will be financially independent). The new tax breaks offered by superannuation, plus the fact super savings will be more accessible, make this the preferred investment vehicle at this stage of life.
The other opportunity that often arises in your 50s is the chance to take more control over your life by establishing your own business, perhaps by getting a significant redundancy payment.
Even if the redundancy wasn’t voluntary, it can provide a valuable chance to build a new, financially viable life outside the 9 to 5 standard working day. But it is particularly important to think very carefully before you use your family home as security for a business loan as a debt-free home is usually crucial for any sort of financial freedom and should not be put at risk without a lot of thought.
The Sixties and later
For many people in their 60s the main financial challenge is to invest their savings to generate a retirement income, and maximise their age pension. In most cases investments are built around some form of allocated or complying pension, in the process maximising tax and social security efficiency.
While there is a tendency for older investors to be extremely conservative, especially when the economic outlook is uncertain, higher life expectancy means a very defensive approach probably will result in your money running out.
This means investors should usually opt for an allocated pension that includes a reasonable exposure to both local and offshore shares, rather than a pension with a very high level of capital security.
While a conservative allocated pension carries less risk of suffering a sudden setback, it can also result in a low annual income and so increasing dependence on the aged pension.
One rule for everyone is to stick with a strategy
Even though some investors make a lot of money by timing markets, these are the exception. Even professional financial managers who handle the investments for Australia’s huge superannuation funds often struggle to add value through timing.
Instead, they develop strict investment strategies and stick with them. If you give yourself plenty of time and patiently stick with a well-designed investment strategy, you will almost certainly be a lot better off in 10 years time than those who don’t. The same rules apply to property investment – it’s not transactional purchases and the aim is to ride out the peaks and troughs of the property cycles.
