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SMART MONEY - On target investing |
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Unfortunately we continue to see examples of investors losing money they can ill afford to lose. As an ADF member, you are drilled to understand that your life may well depend upon the readiness and use of your weapon, so you have to look after it. Your finances are similarly vital to your financial wellbeing and require careful looking after. Money invested into your military super scheme or a bank deposit is about as safe as you can get. However, the amount you can contribute to the military super scheme is limited by law. Money in a bank account, earning around 4.5 per cent each year, is unlikely to grow any faster than increases in the cost of living. If you want to earn more than you can at the bank, you have to accept a greater risk of losing money in bad years or with risky ventures, sometimes even incurring losses of both the income and the original capital invested. Money in real estate, either your own home or an investment property, can grow faster than money in the bank, but nobody can possibly guarantee that and so you have to be careful to pick the right home in the right place. Shares are like that, too, with a higher expected return but also with a higher degree of risk. Generally the rule is: the higher the return, the higher the risk. And don’t forget that any investment where there is potential for rises and falls in value is also dependent on economic conditions. With care and good advice, you can manage these risks, but there are no guarantees. One of the simplest ways to manage risk is to spread your bets. That way, you’re not going to lose everything on a single investment. With shares, you may want to use a managed share fund, where a professional investment manager picks the investments. You can also invest a little bit of money regularly, instead of a big lump sum all at once. That way, you don’t have to make a single bet on whether market prices will go up or down. When it comes to money, your target is going to depend on your own personal needs and circumstances. If you have a family to support, you may need to use more of your available cashflow now, but you may also need to make sure your family will be secure if anything happened to you in the future. If you have big dreams, you’ll need to set more ambitious targets than someone who’s happy to live more modestly, but recognise the increased risk in doing so. If you are thinking about investing, think hard about what you’re trying to achieve and what’s right for you and for those who depend on you. If you can’t control yourself, you’re a danger to yourself and others. That’s as true with money as it is in a military situation. If you stick to careful, sensible principles with investing, you are on much safer ground. I’ve already mentioned checking the risks and spreading your bets. Do your homework and get advice, especially with large amounts of money. When you buy a home, there’s a lot to check: the condition of the building, whether it’s affected by other planing developments, and whether you’re getting a firm and secure title to the property. Do the same with any other type of investment. Make sure you fully understand whatever you’re getting into. In the end, you decide to pull the trigger and you take the responsibility for what eventuates. Jeffrey Lucy is the Chairman of the Australian Securities and Investment Commission. ASIC’s consumer website, FIDO, at www.fido.gov.au offers all sorts of help about money.
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