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Get-rich guide for scaredy cats in the new financial year

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What follows is what I call the scaredy cat’s guide to getting rich.

The key indisputable fact is that we cannot predict with 100 per cent confidence what will happen to share and property prices. You can guess with some confidence what will happen in many years, while you still can get it wrong on an annual basis.

Property vs. shares

A few years back I asked Rod Cornish, the property guru at Macquarie to put together for me a long-term comparison of property versus shares over longer-term periods of time.

He came back with a range of answers but they could be summed up pretty simply. The two assets returned around 10 to 12 per cent on a five-, 10-, 15- and 20-year basis with shares sometimes beating property and vice versa.

Of course the share price returns would have been based on the All Ords Accumulation Index, which adds in the dividend returns, and in case you don’t know, over longer periods of time these contribute around 50 per cent of your overall return from shares!

The property prices used would be averages and this includes good and dud properties in both great and hopeless suburbs or towns.

Quality, time and diversification

The take-outs from this for the scaredy cat investor are firstly that you need to be exposed to these kinds of assets over the longer period of time and secondly, on an average basis, the returns look pretty damn good, especially when most financial planners work out long run returns on about eight per cent per annum.

The third most important lesson is that if you can be smart and pick quality shares and property, then it would be logical that you could get returns greater than 10 to 12 per cent.

So the formula for wise investing has to be — quality, time and diversification. You select great assets, you hold over time and you don’t put all of your eggs in one basket. 

Returns from the top 20

The AFR recently put the spotlight on the top 20 stocks, which you could argue have a fair bit of quality about them. It doesn’t mean all companies in the list of 20 are blue chips, but taken together you only have five per cent exposure to any one company.

This is a very good guide to creating your portfolio with some investors creating their own top 20 based on the companies that have the best track record for paying dividends.

The only problem with that is you can lack diversification, which could punish you for capital gain. 

DIY or stockbroker

By the way, if you want a safe, rock solid, top 20 to 50 stock portfolio and you don’t think you can do it yourself, stockbrokers can listen to your demands and will create a portfolio for you. Some money websites also have model portfolios that you can copy.

If you’re worried about the cost, a broker often charges one per cent to create a portfolio and one per cent to buy the shares. So, if you had $100,000 to invest it could cost you $2000.

If you were a smarty, you could do it for $20,000 and be charged $400 and buy the rest from an online broker. Also, you can just buy a portfolio and buy the shares yourself as well.

Another method could be to invest in ETFs and there are ones that mirror the S&P/ASX 200, which is still a pretty safe way to be exposed to shares.

Once you have a good group of assets, you can just hold them and occasionally review how the companies are going. For novice investors, I do like the hold-great-companies strategy.

Rule of 72

The rule of 72 captures the beauty of time and the compound interest of good quality shares. Imagine if your portfolio averages 12 per cent. If you divide this into the number 72 you find your money doubles every six years.

Sure there will be crashes and booms that will distort this averaging number but over say 20 years these big ups and downs will move back to the average.

And if you have say 60 per cent exposure to shares, 20 per cent to property and 20 per cent to interest-yielding deposits or bonds, then you are conservatively diversified. If you have a long way to retirement you could be 70 per cent exposed to shares but this is not a scaredy cat play!

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Friday, July 01, 2011

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