How to Choose the Right Investing Vehicle for You!
Getting ahead of the curve is not easy, it requires will power, discipline and a plan to execute. With the last two articles, I have delved into the most essential part, which comes down to paying yourself first and minimising your tax through understanding the tax system.
Finally, it comes down to where can you put your money that you have saved on tax and paid yourself first?
What is the best assets that will serve you over the next 10-30 years? To help you make your money work for you, rather than working for money…
Let’s list out the options, starting from conservative to more risky;
Savings accounts and term deposits
Bonds and loans
Commodities/National Currencies (Gold, USD, oil, silver, copper, etc.)
Real Estate/Property
Shares in a company or Stocks
Cryptocurrencies
Every asset or investment vehicle is just that, a vehicle to help you where you want to go. Therefore, it pays to understand where you want to go first. To help with that, I would highly suggest having a read of one of my first ever blog articles here.
Now you have created a location, an end point, a dream to achieve, lets look at the advantages and disadvantages of each asset class and investment vehicle.
Starting with Savings Accounts and Term Deposits…
Advantages
Minimal risk, you will not lose any money
Will get paid interest, depending on the bank and features
Can lock in an interest rate for a specific time-frame if you have a term deposit (Great for when rates are decreasing)
Disadvantages
Potential to lose value on your cash, for an example, right now inflation is 5.2% and the max interest you can earn is 2.60% (ING current rate as of 12th of July) on a standard savings account. Meaning you will actually be losing 2.6% of purchasing power and value on your cash by just sitting it in a savings account.
If locked into a term deposit, not having the option to pull out cash quickly without potential for paying fees etc.
Could potentially lose access to all of your cash if there is a liquidity crunch in the markets, whereby banks lose the ability to pay deposits. (A real fear back in the Global Financial Crisis. In Australia, $250,000 is guaranteed by majority of banks thanks to the government)
Bonds and Loans…
Advantages
Greater returns than savings accounts
Mostly guaranteed payments with a locked in rate (Corporate bonds can be more risky, but with a greater return potential)
Minimal risk, much like a savings account, especially in Treasury Bonds (A loan to the government)
Disadvantages
Difficult for retail investors like you or I to invest in individual bonds, therefore you need to look into bond funds.
Bonds can be complex and can be quite price sensitive to interest rate hikes or decreases.
Can also be sensitive to market sentiment, as seen by the increases in bond markets recently, whereby the markets are betting on higher rates.
Commodities/National Currencies…
Advantages
Generally seen as an inflation hedge (Although national currencies are quite often weaker as inflation increases generally)
When inflation is high, we start to see that commodity prices increase.
Can be lower risk than shares, due to the price stability compared to listed companies.
Disadvantages
Offers no actual value or payments other than the price, therefore your hopes ride on the price increasing.
Can be more risky and more volatile depending on market sentiment at the time, as well as the global environment and a big emphasis on supply and demand (Economics).
Can be fairly illiquid and difficult to sell, depending on how you buy (For eg; if you buy solid gold bars etc.)
Real Estate and Property
Advantages
Has been the greatest wealth builder in Australia over the last 30 years (But does not deliver the greatest returns on average per annum)
Generally less risky compared to shares, but higher risk compared to Bonds and savings accounts.
Can have great tax minimising benefits, especially for high income earners
Gives you a roof over your head if buying a home to live in
Disadvantages
Cost of maintenance and upkeep
Interest rate risk, whereby increasing rates increases the cost of loan servicing/costs
Very illiquid, as it can be difficult to sell and takes time to sell the house or commercial property.
Especially right now, the cost of owning a home or investment property is quite high, with prices at all time highs.
Taxes on buying property are quite high
Shares of a company, Listed Managed Funds, Exchange Traded Funds
Advantages
Has the greatest average per annum rate of return over the last 100 years
Very liquid, you can buy and sell very quickly most of the time
You can use a dollar cost averaging technique, which has become really common over the last five years to hedge against the volatility of the markets. (A technique used over the long term, roughly 7-30 years)
Improves the living standards of people through companies and firms being able to use capital to solve solutions
Dividend payments can be paid out, especially amongst the blue chip (Big market cap) companies.
Disadvantages
Prices can be highly volatile in the short term and therefore are high risk and highly susceptible to market sentiment, based especially on forecasting.
Due to the asset being very liquid, can be vulnerable to behaviourial bias, whereby if market prices decrease, the fear of loss leads to selling at the low prices, creating a potential loss.
Companies can go into admission and you can lose all of your money
Brokerage fees (the fees paid for buying a share, ETF etc)
Capital gains tax is set quite high
Cryptocurrencies
Advantages
Over the last five years especially, there has been a major bull run on crypto assets, which has made a lot of people quite rich
Fairly liquid, when market sentiment is high
There are a lot of Crypto companies doing great work and offering very high interest on their coins
Disadvantages
Very volatile, more high risk than most companies or stocks
Has no real value, whereby payments are not made and regulation is very low
Very susceptible to market sentiment, as shown quite recently, whereby bitcoin was seen at a high of $68k and is now below $20k at time of writing
Can be illiquid if there is a run on the coin, much like actual cash from a bank, when people pull all of their actual cash out of the coin and the value goes to zero (losing all of your money)
All of the above is a very simple list of the advantages and disadvantages, which as you can see can be quite confronting, however if you have the risk appetite, you can see some great returns on the money you have worked so hard to save.
From here, you simply need to understand how you handle risk and the idea of losing money.
The more risk you can take on, the more likely you can attain greater benefit, however the more likely you are also to lose your money. Therefore, understanding your ability to handle risk will determine what asset class or investment vehicle is best suited to you!
To understand your ability to handle risk, I would advise that you enlist the help of a trusted Financial Advisor, who will be able to guide you through the complexities of choosing which asset class and investment vehicles will be best suited to your risk profile and goals.
Which leads to the end of our Getting Ahead of the Curve Series, hopefully you have been able to take something out of the series and I truly want to see that you can use some of what I have discussed to improve your ability to get ahead!
Until next time,
Take Back Control
