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Switzer shares secrets

British funny man, Mitch Murray, once made the memorable observation that what this company needs today are fewer experts on what this company needs today! Certainly, many companies are over-consulted but I reckon the opposite is the case for investors and wealth-builders.

One of the big turn-offs for money information is that it’s convoluted, couched in jargon and is often boring!

Below, I offer some interesting pieces of advice that various experts have shared with me over the years. (I’ll put my cautionary observations in brackets.)

What the experts advise, warn and know:
Allocate a portion of income to saving and investment.
Like a business, create a plan with a goal and a step-by-step blueprint of how you’ll get there.
Start early, use discipline and build up capital.
The later you start, the more you’ll have to put away to catch up.
Save, and then save even more!

3-5 per cent should be put away in savings and/or super, as a bare minimum in the early days, but you should be aiming to save 15 per cent of your income for 40 years!

Plan as best as you can.

It’s good to have a definite plan, but any commitment to any saving is better than nothing. Be mindful of your plan as a working document. Review your plan once a year.

Plastic can be fantastic.
Use credit and credit cards to YOUR advantage. Read the fine print with your card and kill related fees.
Work out your lifestyle to create savings.

For example, buying pay TV services to avoid going to the movies and hiring videos could save you more. This shows the value of a plan.

Spend money on YOU.
Invest in yourself, as education can create income opportunities. Career or money education can be rewarding.
Don’t procrastinate when income circumstances change for the worse.

Treat it like an ‘intensive care ward’ and set things right quickly. This could mean changing spending patterns, renegotiating loans and talking to lenders. Be proactive about building your future wealth!

Don’t over-insure or under-insure.
Check out your insurance coverage, its cost and compare alternatives.
Get out your scissors!
Check out the fees you pay on mobile phones, loans, superannuation, insurance, banking, etc. and try to cut them down.
Be tax smart.
Find out what tax-saving opportunities exist for someone like you.
Borrowing sensibly can create wealth.

Understand your cash flow when locking into an investment deal, which involves borrowing and repayments. Work out how your life will be affected if interest rates rise by say 1 or 2%.

Don’t go overboard on the advertised pay-off from negative gearing.
You can lose. Positive gearing is okay too. These properties give income, but they tend to rise in value more slowly.
Invest for the long-term.

Looking at the All Ords between 1959 and 1989, the trend return on average was 6.7 per cent. Between 1984 and 1999, it worked out around 14 per cent. In 1974 and 1999, it was 13.8 per cent. This shows the value of homework.

Don’t invest in one asset type, such as all shares or all property.

The fund managers put their money in property, shares, interest paying securities and cash. Don’t just hold Australian shares. Some overseas shares give you diversity.

A slump in the stock market can KO a one-time good share.

When it loses 75 per cent of its value, it could take eight years for it to recover. Smart investors create a portfolio with between 10-15 shares and so if one drops terribly it has less affect on the total portfolio.

Many advisers recommend buying or selling in blocks, or parts, of share holdings.

This means if you thought the market had hit a top, but had nagging doubts, then a partial sale followed by a wait-and-see period could be the sensible way to go. You should learn about the signs in a market that encourage you to buy or sell.

Be prepared for the down times.

While unit trusts or an investment fund are less vulnerable to a sell than an individual share, they can cop a terrible hiding in a big sell down of the market.

Educate yourself!

Even if you’re planning to be a passive investor locked into a fund, educate yourself about what fund managers do, how trustworthy investor information is, what your downside risks are and if you can cope with a bad run for the market. You also must understand franking or tax credits on dividends.

And finally…

If you plan to run your portfolio of shares, a number between six to 12 different stocks is recommended. And make sure they’re not similar stocks, for example, all banking shares.

Don’t simply believe generalisations based on the history of stock markets; rather use them to construct your action plan.

No one ever went broke taking a profit. Sometimes it’s a good idea to sell some of your shares when they go for a big rise to pocket some profit in case the good news is totally reversed.

Published on: Wednesday, November 01, 2006

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