Your Money

The ten commandments

The guy had a wonderful business-related windfall and his bookkeeper thought it was simply income to his company, which would have meant a tax bill of some $80,000. However, looking at his unusual approach to business matters and his age, I ran his story by a hotshot at accounting firm Deloitte.

Seriously, many a suburban accountant would have missed the vital issues that produced this result and it underlines the value of good advice. The cost of such advice could run between $5000 to $10,000 but considering the result, it would have been false economy to have taken the ‘tightwad’ option.

The first is to pay for good advice and do your research seeking testimonials to ensure you are paying exactly for great calibre advice.

The second is to understand the business you are investing in. This is classic Warren Buffett advice, who is a long-term supporter of good businesses such as Coca-Cola, American Express and Gillette. One of his most famous lines emphasises his approach: “It’s pleasant to go to bed every night knowing there are 2.5 billion males in the world who have to shave in the morning.”

• Does the company have good long-term outlook?
• Is the CEO smart and honest?
• Is it priced well?

The tip is to review your portfolio and give it the Buffett tests, especially with share prices giving into gravity at the moment.

Back to reality

Third, make sure you take a risk reality check. Do your investments reflect your appetite for risk? By the way, as your shares go up in value, it is worthwhile thinking about rebalancing your portfolio. In fact, there are many of us who are really long on Aussie shares and effectively are over-exposed to one asset class.

A typical well-balanced portfolio might be made up of 35 per cent local shares, 25 per cent foreign shares, 20 per cent fixed interest deposits, 10 per cent cash and 10 per cent property.

Quality assurance

Fourth, run a quality test over the assets that you are invested in and work out whether the balance between shares, property, cash, etc. is going to deliver the outcome you want.

If you haven’t worked out what you want in 10 or 20 years and even beyond then you are making a big mistake.

Helicopter view

Fifth, don’t just look at how diversified your assets are – shares, property, cash – have a fresh look at your portfolio. Are you too long on one sector that could leave you exposed in the long run? If you can’t evaluate it, think about talking to a broker or an adviser for an objective viewpoint.

Matter of timing

Sixth, timing the market can be a challenge for even professional fund managers, so I like supporting quality stocks with a policy of buying them on dips to dollar cost the average the share prices paid down.

It does mean you might have to cop a bad one- or two-year average-return, but I reckon the tactic produces great five-year and 10-year returns.

Read between the lines

Seventh, be wary of the fancy investment products that are akin to gambling. I don’t want to bag some heavily advertised products, but they are often portrayed as being more straightforward than they really are.

Get into gear

Eight, have a rethink about your gearing strategies. Make sure you do your figures on rising interest rates and a market under pressure until around mid-year.

Hedge your bets

Nine, if you invest overseas make sure you are aware of your foreign exposure risks as they can undermine a great strategy. If you think the currency is going up then hedging should be considered.

The golden rule

Finally, identify your target wealth goal and see if you are on course to make it happen. Our money doubles according to the rule of 72. This says take the number 72 and divide it by your expected rate of return on investments, say 12 per cent, so your investments double every six years.

Of course, there’s tax to pay and that’s why advice can be a big help to the final result. Ask yourself the question: should I be buying shares inside a self-managed super fund? It certainly is a more tax-effective way to play the market.

Make your 2008 investments based on these 10 fundamental principles.

Published on: Sunday, February 01, 2009