Ten simple rules for successful investing


Rule 1: Goal Setting
Goal setting is the first and most fundamental step in the wealth creation process – when you have a specific goal, the rest of the financial planning process falls into place.

Setting specific goals helps you stay focused. As the old adage goes, if you don’t know where you’re going it’s impossible to get there!

A successful wealth creation plan should cater for all financial goals throughout your life (including in the short, medium and long-term) and have the flexibility to change whenever your goals change.

Before setting your goals, find out where you are standing now:

  • Use Count’s budget planner and calculate where you stand financially.
  • Then download Count’s Goal Planner to help you decide what your short term, medium term and long term goals are.


Rule 2: Pay yourself first
Many people approach wealth creation by planning to save whatever money is left over after all their other expenses have been paid. This is not a system for success – as you may find there’s nothing left over!

The secret is to make your goals top priority– by setting aside your savings and paying yourself first.

So how much can you afford to save and invest and still pay your bills?

Use Count’s budget planner to list your expenses and income and calculate the surplus you have available to invest.

You can now treat this monthly surplus as a fixed expense so you give your financial goals the priority they deserve.

Example

Sally earns $1,000 per week (after tax). She has calculated her weekly fixed expenses to be $600, meaning she has a $400 surplus.

Sally pays the $600 for her fixed expenses into her everyday bank account. This is Sally’s spending money.

The remaining $400 is automatically invested so Sally is never tempted to spend it.

Budgeting for busy or lazy wealth creators
If you’re too busy or lazy to calculate your exact income and expenses, you can ‘guess’ the potential surplus you can afford to save.

If you overestimate your costs, you can always reduce your automatic savings program.

Your Count Adviser can help you set up an adjustable system to save and invest automatically.


Rule 3: Make your saving automatic
It’s easy to forget things when we are all so busy. So the more streamlined and automated our tasks, the more successful we’re likely to be.

Wealth creation works the same way. You’re more likely to be successful when you have a system in place that makes saving and investing automatic – so once set up, you don’t need to do anything.

Step 1: Build up an ‘automatic’ pool of cash for short-term goals – ‘Peace of Mind’ wealth
Most employers are happy to pay your salary into two separate accounts – one for everyday living expenses and one for savings.

By automatically paying your savings into a designated account, you don’t need to remember to set the money aside.

You will then be on your way towards building up your ‘Peace of mind’ wealth. This could include savings for emergencies and short term expenses.

Step 2: Make ‘automatic’ investment contributions to build medium and long-term wealth – ‘Lifestyle’ and ‘Retirement’ wealth.
Once you have a cash safety net, you can also arrange an automatic investment program (called a ‘savings plan’) that invests funds each month into a managed fund. Managed funds can be selected to achieve to both medium and long-term financial goals.

The idea is to make the entire savings process as simple as possible – and one of the best ways to do it is to make the entire system automatic.


Rule 4: Get compounding on your side
Compounding is the process of reinvesting your investment returns. It has been described as the eighth wonder of the world because it’s so effective in helping you build wealth.

Through compounding, your money makes money, which makes more money, which in turn makes even more money. The longer you leave the compounding process in action, the more money you will have – it’s literally that simple.

To really illustrate the impact of time and compounding, let’s examine 3 types of investors:

  • Smart Saver invests $50 per week for 10 years, starting at age 25.
  • Late Saver saves $50 per week for 10 years, starting at age 35.
  • Hard Saver invests $50 per week from age 35 until retirement at age 65. Both Smart Saver and Late Saver invest a total of $26,000 over 10 years while Hard Saver invests a total of $78,000 over 30 years.
Age
Smart Saver
Late Saver
Hard Saver
25
0
0
0
30
$16,627
0
0
35
$43,371
0
0
40
$69,849
$16,627
$16,627
45
$112,493
$43,371
$43,371
50
$181,171
$69,849
$86,386
55
$291,778
$291,778
$155,571
60
$469,912
$181,171
$266,849
65
$756,798
$291,778
$445,830

The table shows that in the end, Smart Saver has accumulated the most. Even though Smart Saver and Late Saver invested the same amount, Smart Saver ends up retiring with over $460,000 more than Late Saver and over $310,000 more than Hard Saver – purely due to the effects of time and compounding returns.

Compounding is most effective when it has the maximum possible time to work. So the best option is to start the process…now!


Rule 5: Understand and control investment risk
All investment decisions involve a balancing act between the return you need from your investments and the risk you’re prepared to accept. The general relationship between risk and return is that the higher the amount of return you seek, the higher the level of risk you must take.

There are several strategies that can be employed to reduce risk while still generating returns but beware of anyone offering “risk free” high return investments.

The most common investment strategy mistakes result from investors not understanding the risk involved and selecting strategies and investments that don’t match their risk profile.

Successful wealth creators understand the nature of investment markets and as a result, choose more appropriate and successful strategies and investments. Risk is changed by time. Investment risk changes over time – investments that are low risk in the short-term are generally quite high risk in the long-term (and vice versa).

Example

Most people agree that savings accounts are low risk, whereas shares are high risk. This is because they’re only focusing on the
short-term

Whilst savings accounts offer security to your initial investment, they generate low interest, are fully taxable and almost always generate a very small real return. In fact, when you factor in inflation, savings accounts can actually generate
negative returnsover the long-term.

So while cash is the perfect option if you’re saving for a goal within the next 12 months, it’s a very high-risk option to fund long-term goals.
Shares on the other hand are high risk in the short-term – there is a significant chance the value of your shares could go down. Yet history shows the value of shares goes up and up over the long-term – so they’re more suited for long-term goals.

The secret to managing risk is to set clear goals with a set timeframe and choose appropriate investments – short-term investments for short-term goals and long-term investments for long-term goals.


Rule 6: Diversify your investments
Diversification in the financial equivalent of the saying “Don’t put all your eggs in one basket”.

One of the most common mistakes made by investors is to have too much money invested in one single asset or one asset class (eg, Australian shares). The risk is that if that one asset (or asset class) fails to perform, a substantial portion of your portfolio is affected.

Assets move in different economic cycles – this year’s best performing investment becomes next year’s worst. It’s very difficult to know what the best performer will be.

The best way to reduce the risk market fluctuations present is to invest in a number of different asset classes, countries and companies. This will help reduce risk, smooth and increase your returns.

Diversification can be easy
One way to diversify your investment is through a managed fund – and you can start with as little as $1,000.

In a managed fund, the experts decide how much should be invested in each asset class. In effect, they ‘manage’ the funds and decide which countries, industries and companies to invest in.

There are over 3,000 managed funds available that you can invest in Australia. Each has a different design, purpose and cost. Ask your Count Adviser which funds suit your goals.

Find out more about investing in managed funds and how they can assist with investment diversification.


Rule 7: Pay less tax
Tax is likely to be the single largest non-productive expense you will incur in your lifetime.

Whilst paying tax is an integral part of Australia’s social structure, legally reducing the amount of tax you pay is a key element of successful wealth creation.

There are four steps to minimise your tax.

You need to:

  1. Decide how you are going to structure your investments to legally reduce your tax payable;
  2. Select tax-effective investment strategies;
  3. Select tax advantaged investments that you hold within those tax structures; and
  4. Buy and hold good quality assets so you don’t trigger capital gains tax.


Structuring your investments to legally reduce your tax
Tax structuring decisions are never made with tax purely in mind. Other factors include:

  • Business owners protecting their assets from creditors in the event of unforeseen bankruptcy;
  • Transfer of wealth to future generations; and
  • Protecting your wealth in the event of a failed marriage.

Some of your tax structure options include:

  • Sole trader
  • Joint name investing
  • Partnership
  • Companies
  • Discretionary trusts
  • Self managed superannuation funds
  • Investment companies

As this is such a complicated area we recommend you seek the professional tax advice of your Count Adviser. They will recommend the appropriate tax structures suited to your personal, family and business circumstances.

Selecting tax-effective investment strategies

Peace of Mind wealth

  • Tax structuring

Lifestyle wealth

  • Tax structuring
  • Savings plan
  • Regular gearing plan
  • Negative, neutral and positively geared property to buy another property or shares
  • Margin lending (borrowing against your shares to buy further investment)

Retirement wealth

  • Tax structuring
  • Undeducted contribution strategy
  • Spouse contribution strategy
  • Salary sacrifice strategy
  • DIY Super Fund


Selecting tax advantaged investments
Warning: Count has a long history of warning Australians to avoid ‘investments’ that are only poorly managed, high cost and marketed solely on their “tax deductibility” because of their inappropriateness and high-risk of loss of capital.

Buy and hold good quality assets so you don’t trigger capital gains tax.

With the continued growth in online share trading, many people try to TIME the market. They believe they can maximise their wealth by buying and selling long-term assets eg shares.

The value of each share and therefore the entire market is made by the buying and selling decisions of the millions of Australians and International investors. When you guess the collective end result of the minds of all investors and make short-term decisions with long-term assets, that is behaviour akin to gambling.

The success of your investment portfolio will depend on the length of time you spend in the market, NOT on your ability to buy and sell based on short-term market fluctuations.

Every time you buy or sell in the stockmarket, you incur trading costs. And when you sell an investment that has performed well you lose part of your money to the taxman in the form of capital gains tax (CGT). This means that every time you sell an investment that has increased in value the taxman takes part of your money, so you will have LESS money to invest next time.

Capital Gains Tax (CGT) implications
After selling an investment, you must then find an even better investment, to make up for the capital gains tax lost forever to the taxman.

Count Advisers are conservative investment advisers. We believe the secret to successful wealth investing is to BUY and HOLD “quality assets” with a history of rising income payments and therefore rising capital values.

We have seen that people are far more successful wealth creators when they focus on growing their salary or business, rather than buying and selling investments.


Rule 8: Don’t try to time the market
Many people worry, “Is now a good time to invest?” They worry that if they invest at the ‘wrong time’, they might not get the best result.

There are always apparent reasons not to invest – the market is nearing its peak, the market is falling and so on. The fact is, despite all the doom and gloom, throughout history the market has maintained a significant upward trend over the long term.

The ultimate success of your investment portfolio largely depends on the length of time you spend in the market, NOT your ability to predict short-term market highs and lows.

Don’t let procrastination rob you of any further financial security and the freedom to afford your dreams.

The earlier you start investing and the longer you stay invested, the more wealth you can build up over the long-term.


Rule 9: Good debt versus bad debt
Whilst debt can sometimes be viewed in a negative light, it can be an effective way to increase your net wealth if used for the right purposes and in the right way.

Borrowing money to purchase growth assets – or those which will continue to produce an income – can be considered “good debt” because it has the ability to increase your net wealth over time and help you towards a financially secure future.

“False wealth” consists of depreciating lifestyle assets such as cars, boats, clothes and consumer items.

Borrowing money to buy assets such as cars, boats or clothes can sometimes be considered “bad debt” because these types of purchases will not produce an income, they will depreciate in value and actually generate extra expenses.

One of the secrets to become wealthy is to invest as much money as possible in real wealth assets that work for you, and limit your spending on things that wont.

But you don’t have to go without life’s luxuries all together. By investing your money in assets that produce an income, you’ll actually have extra money to make many more enjoyable purchases over your lifetime.


Rule 10: Stay on track
Changes in your personal situation, legislation or the economic environment can have a significant impact on the long-term success of your wealth creation plan.

Even the best-laid plans need to be regularly adjusted and fine-tuned.

Regularly reviewing your investment portfolio and strategy can help you avoid unnecessary taxation, poor investment performance and missed opportunities.

We recommend that you have your investments and financial position professionally reviewed at least once every 12 months.