Investing for the future: Part Two

Are you financially fit? Creating wealth through investing starts with a solid financial plan. This article is the second part of a two part series by Financial Advisor Ben Brett from Bounce Financial which will teach you how to get your finances ready to invest. If you missed part one of this series about getting the foundations right, then check it out here.

In part two, he will address how you can use your new financial fitness and start planning for the future by investing.

Part Two: Investing for the future

In part one of this series, we addressed how you can develop your financial plan to address the three main areas of your life:

  • Current You
  • Medium Term You; and
  • Future You.

In ‘Current You’, we calculated how much your life costs to live, worked out where you can save money, and automated your finances using multiple bank accounts.

In ‘Medium Term You’, we identified how much money you can put towards your medium-term goals and identified what they are.

In ‘Future You’, we discussed what your goals are for the long-term and in particular, those goals which you want to achieve prior to retirement.

Now we are confident about your goals and how much you can save, we need to consider how best to invest this money.

How do you choose the right investment?

Despite opinions to the contrary, there is no ‘right’ investment. Whilst investment amateurs may favour one type of investment, people who understand investing tailor the investment to suit their goals.

There are three things I consider when recommending an investment to a client:

  1. Does the investment type align with the goal?
  2. How much does the client have to contribute to the investment?
  3. What is the timeframe until the client wants to sell that investment?

Does the investment type align with the goal?

The biggest mistake I see when it comes to investing is that most people start with what they want to invest in and work backwards from there.

A common line I hear from clients is that they bought an investment property because they understand and feel comfortable with property. Whilst this may suit them, if their goals don’t align with this type of investment, then it isn’t a good investment for them.

I’ll give you an example. Many of my clients are interested in investing in the costs of sending their kids to a private school. Whilst an investment property may be a good investment, it may not suit this particular goal. 

Once their child hits year 7 and they want to pay for school fees, they are going to need to access some of their investment. The problem here is that they ‘can’t sell a bedroom’, the only option they have is to sell the house in its entirety or not to sell it at all. 

If they don’t sell the property, then the investment isn’t helping them with their school costs. If they do sell the property, this means that from year 7 to year 12, their money is no longer invested and they need to find an alternative solution.

In this instance, they may have been better suited to a more ‘liquid’ investment such as direct shares, an ETF, or a managed fund which would allow them to sell portions of that investment every year.

By aligning the investment type to the goal, you can better utilise your investment funds.

How much does the client have to contribute to the investment?

In part one of this series, we worked out exactly how much excess savings you have to dedicate to your investment. At different times in our lives, we have more or less money. 

For example, I work with a lot of young families who are going through the maternity leave period. Whilst they have in the past had a lot of excess money to put towards investments, for the next few years, the idea of them being able to contribute a lot to an investment is unlikely.

Why is this important? Because a lot of investments have minimum amounts. Even if you do meet the minimums, the fees for a small balance may be so substantial that it offsets the benefit of the investment.

Knowing exactly how much you have to put towards that investment each month helps in clarifying what the right investment is for you.

What is the timeframe until the client wants to sell that investment?

Finally, in the previous article, we went through the steps to understand what your medium-term and future goals were. The benefit of doing this is we now have an idea of how long you need to invest to achieve these goals.

As a general rule, the shorter the timeframe you have to invest, the less ‘aggressive’ an investment should be. This means that you should expect a lesser return. An example of a less ‘aggressive’ investment includes a term deposit or a high-interest bank account.

On the other hand, the longer the investment timeframe, the more opportunity to invest in ‘aggressive’ investments which over the long-term should hopefully deliver a better return. Examples of an ‘aggressive’ investment can include an investment property, shares, managed funds, and ETFs.

The reason timeframes make a difference relates to ‘volatility’. Volatility is how much an investment goes up and down in value in a short period. If you need your money in the short-term, you generally want to invest in a less volatile investment so you can be certain of the investment’s value when you need it. If however you are happy to wait, how much your investment goes up and down in the short-term isn’t as big an issue, as long as over the long-term, it grows as much as possible.

When it comes to selecting investments, you may wish to combine a number of different types of investments based on your goals. For example, for your medium-term goals, you may wish to choose less aggressive investments. For ‘Future You’ however, you have more time and may wish to choose a more aggressive investment in search of a higher return.

Selecting the right investment

Remember, there is no ‘right investment’. The best investment is the one that suits your goals, contribution levels, and timeframes. This may be one investment, or it may be many different types of investments. 

By determining how much you can save and what you want to achieve for ‘Medium Term You’ and ‘Future You’, you are a lot closer to coming up with a solid financial plan.


Author profile imageAbout Ben Brett

Brisbane financial planner, Ben Brett of Bounce Financial specialises in providing financial advice to young professionals who have bought their first home and are wondering what comes next.

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