Easy rules to help you get ahead

• Ignore the prophets of doom – they are always with us and usually wrong.

I have been investing for more than four decades and have never known a time when somebody was not predicting that the next stock market crash or economic recession was just around the corner.

Nobody can consistently and accurately forecast what investment markets will do but many people fall into the trap of basing their financial future on predictions. Often this means they sit on their hands waiting until the time is right to invest and miss out on many opportunities.

• Don’t panic when the sharemarket has a bad day – volatility is the price you pay for the unique benefits of shares.

No other investment offers the flexibility and tax benefits of Australian shares.

However, every investment has a disadvantage. With shares, it is that prices can be highly volatile. There is no need to be spooked by this.

In the average decade there are four negative years and six positive ones. That is why you should always invest in shares with a seven-to-10-year timeline in mind.

• Diversify your investments across major asset classes and include some international exposure.

It is a basic investment principle that you don’t put all your eggs in the one basket – you spread your cash across asset classes to decrease risk.

However, many people misunderstand diversification: they think having a portfolio of residential properties, or shares in all four of the big bank banks, is diversification. It’s not.

• Understand compounding: appreciate that the rate of return your portfolio achieves is a major factor in how long your money lasts.

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You can’t make more time, so the rate of return your investments achieve, after fees and taxes, determines how much you need to save to reach your retirement goals – and how long the income on your portfolio will last after you retire. This is why you should seek the best returns that fit your goals and risk profile and be aware what fees are being charged.

• Well-meaning acquaintances who give you half-correct information can be your worst enemy.

One of the biggest problems investors face is a wealth of information – and misinformation – from a wide range of sources.

Usually this information does not cover the entire topic and may be incorrect by omission.

You are far better off to set yourself up with a good long-term plan, then stick with it and have regular consultations with a financial adviser.

• Review your financial affairs regularly so they are always sound.

Your personal situation always changes, markets fluctuate and new investment products emerge.

Your family situation also varies as children are born, grow up and some people pass on. This is why it is essential that you sit down at least every 12 months to optimise your financial affairs. It doesn’t take long and may save more serious problems down the track.

• Understand the basics that never change and take advice on the things that do.

When considering changes to your finances, measure them against timeless principles, such as spending less than you earn, greater returns coming hand in hand with greater risks, and the importance of time and rate to your returns. Then seek professional help on how to implement changes, using a financial adviser, accountant or lawyer, as appropriate.

• Involve your partner in all financial decisions and monitoring. This will make it easier if one of you passes away or becomes incapacitated. It also fosters marital bliss.

It is common for one partner in a relationship to handle most of the household’s financial matters, even if major decisions are discussed and made jointly. This can cause havoc if they become incapacitated or die.

In any relationship, both people should be involved in the financial affairs, know where asset records are kept, and what passwords are required for access.

• If a person contacts you to offer a “free” seminar, an investment, or even to help you pay your mortgage back faster, ignore them.

Any person who contacts you with a financial offer will be doing so for their own benefit, not yours.

Good investments don’t need hard sales tactics, such as cold-calling, or email campaigns. It is more likely to be a scam to separate you from your hard-earned money.

• Always judge an investment on its merits – tax benefits are the cream on the cake.

Time and time again investments are promoted as being highly tax effective.

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Often the potential investor gets so focused on the alleged tax benefits that they fail to investigate the disadvantage of the purchase as well as the tax benefits.

• Be wary of going guarantor for your children – especially if they are in business.

It’s natural to want to help your children but don’t damage yourself in the process.

Going guarantor for anybody can be risky. If you do decide it is worth it, make sure your guarantee is limited. For example, if you are helping your child buy their first home, limit the guarantee to the value of the home, and have it removed at the first opportunity as the house increases in value.

Stay well away from any guarantees for people who are in business – 80 per cent of new businesses fail in the first five years.

• Investigate whether to have a Binding Death Nomination in your superannuation fund.

It is the trustee of your fund who decides how the proceeds of the fund will be distributed if you die.

You can bypass the trustee by executing a Binding Death Nomination, but keep in mind that executing one may prevent the executor of your estate in arranging your affairs in the most tax effective manner. Always seek specific financial advice.

Noel Whittaker is the author of Retirement Made Simple, which expands on many of the concepts in this article. [email protected]