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What do Jack Nicholson and money management have in common?

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When it comes to sorting out your money life, I recommend two things – be honest with yourself and do something. If you need an image to get motivated, I suggest you think about the Jack Nicholson movie A Few Good Men.

I could stretch the imagery and ask, who is going to offer you wealth protection from the hazards of the money world? You? 

It ain’t easy

Well, of course you should be able to but ‘you’ might have to make a few changes. And if ‘you’ can’t or won’t, then you might need a few good men or women!

At the heart of why many of us are unhappy with our money or wealth position is because we have thought it was all too hard. It’s not but, as with most things, nothing worthwhile comes easily. 

Money lessons

I recently thought about the most important lessons I have learnt over the years of talking and thinking about money – what are they?

Well one is that shares do outperform bonds generally but bonds operated by an experienced bond manager can outperform shares. I love blue chip stocks that have a history of paying great dividends.

In fact, history says 50 per cent of the return from shares comes from dividends.

On the other hand, I will buy companies such as BHP-Billiton that don’t pay great dividends but can deliver great capital gain, especially with its current link to China’s modernisation, which can’t happen without steel.

What drives my shares selection? Like Warren Buffett, I buy great Australian brand names. I like to punt on the success of Australian industry. 

DIY?

For those who want do-it-themselves, you must note that the average fund manager does not beat the index on average and that’s why index funds are worth considering.

Of course, great fund managers argue that an average fund manager might not beat the index but above-average ones can and do. That’s where homework or a great adviser can help build your wealth.

For small amounts such as $20,000 you could throw it all into an index fund or an ETF, which gives you exposure to a wide range of shares or assets. Always be wary of just buying one or a few shares as even great companies can have a shocker.

More exposure

When it comes to creating a portfolio of shares, I like 20 shares in my portfolio so I only have five per cent exposure to any one company, but some experts say 10 to 15 can be okay.

An important lesson to remember is that if you buy shares and hold them, you have to expect that your money will go up and then go down. However, history shows that the magic of compound interest will over time deliver good returns. Great shares do return around 10 to 12 per cent per annum over 10- to 20-year periods, but there can be bad periods where the returns go up and down. If you average 12 per cent then your money should double every six years. That does not mean it happens every six years, but on average it will. You see, when the market rose at 20 per cent or more before the end of 2007 brought the credit crunch and market meltdown, investment money was doubling every three years! (You work out doubling rates by dividing the percentage return in to 72. So, if you have six per cent return, it takes 12 years to double your money. Don’t ask me why, it just does!) 

Property opportunity

While financial advisers and newspapers talk a lot about shares, property is a great asset. To buy a house you love and renovate it, delivering yourself a capital gain if you sell it that you don’t pay tax on is a great opportunity, but be careful of over-capitalisation.

Also, using equity in your home to buy a negatively geared property or, better still, a positively geared property are great ideas. An investment property with a tax strategy can be a great way to build wealth pretty safely. You can even think about a cautious use of this borrowing technique with tax deductions to buy great quality shares, but go into this with your eyes wide open and knowing what you could lose.

Expert help

My final lesson is a few great advisors – a financial planner, accountant and a lawyer – can help you create the tax-effective way to build wealth and prepare for your financial future. The above-average advisers think about you with an objective set of eyes. A great team of advisers might not only come up with a great plan, but create the right, tax-effective vehicle to accumulate your assets in.

I believe we all can do an enormous amount of DIY investment work ourselves, but history has taught me in trying to grow my business, my media career, in trying to get fit, in trying to lose weight and in sorting out my tax affairs that experts, who know more than me and who care about me succeeding, always cost less than what they have given me.

Great leaders say you have to confront the brutal truth and then take action and if expert help is needed, seek it out. A few good men or women might be the right option if you know you can’t help yourself.

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: Thursday, June 16, 2011

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