Foo - My investment/use of money - HELP APPRECIATED!

Hi Everyone,

I had such a wonderful response to my first questions about Money. I have followed those up and learnt a lot!

Great news!

I have secured goal number 1: Save up enough to live comfortably for 6 months if the need arises.

I shall now leave that alone in a bank account with a 5.25% interest rate.

Now step 2. Hmmmmmm

I feel my current options are

1. Invest in shares
2. Invest in property
3. Keep saving, do nothing for the moment
4. Save up for a holiday

1.

There are some companies I am interested in but I do not feel I know enough about the whole shares aspect yet such as the tax implications and management requirements

2.

Property has skyrocketed in my area due to a resources boom. Some rents have scarily doubled in my area and property is about 17% increase overall. I have fixed rent for another 2 months then my rent shall likely go up substantially.

I am also unaware of my job status. It seems like I will be around for the next 3-5 years but that is largely dependent on the resources boom. Hence I find my fortunes locked into one industry. Eg. If I bought property if would be great as long as the resources industry was great. So would I in income. But if the resources industry collapsed I would be looking for a new job and my property value would plummet. I feel it would be hard to handle.

3.

This is looking to be my preferred option right now. I feel I have to learn more about the stockmarket as I would hate to lose :)

I also am concerned that I am in a boom and everything and everybody is BUY, BUY, BUY!
It is like everyone now has a fancy car and boat in their driveway!

How do these booms generally pan out? How long do they generally last? Because it is so linked to the resources industry, would I be correct in assuming it would be foreclosure city if the resources area slowed down.

Anyone know how the West Australian Resources sector is looking for the next 10 to 20 years?

4. I would like to do this too but in combination with one of the above.

A modest holiday is all I need.

---------------

In conclusion, I guess I am a little lost as to where to go from here. I appreciate all your comments and answers to my questions :)

1. contribute maximum to employer-sponsored retirement plan
2. contribute to long-term personal investment plan (depending on allowed national self-employed, personal investment plans; here in U.S. it is SEP-IRA for self-employed, IRA, or Roth IRA, depending on income level)
3. purchase real estate (next best thing to stock market); it is not liquid, but is [usually] tax-beneficial
4. don't blow your wad on holiday
5. keep riding your bike
6. don't get married; but if you do, never liquidate pre-marital assets!

:-)

Being not from Australia, I can't comment on specifics. But I continue to highly encourage an index-oriented approach. Perhaps read about how the rules of math can't be broken (http://www.vanguard.com/bogle_site/sp20060101.htm). (The data supporting the thesis is very US-oriented, but the concepts are sound regardless.) The great thing about an index-oriented approach is that you don't have to make decisions once you've set up your plan. You just execute according to plan, and it's all hands-off. I think that's great since it minimizes the cost in your time. And if you simply index the universe of investments and do so at low cost, you're guaranteed to slightly outperform the weighted average of everyone else's results.

Don't tie your money in the long run to your local economy. It's too undiversified, so it would subject your portfolio to high volatility in boom/bust cycles. Personally, I'd try to approximately index the world. You should also find someone with good financial knowledge from outside the major currency zones (ie not in US, Euroland, UK, or Japan) and discuss whether to (and if so to what extent) hedge currencies in your investments. Your considerations are different from those of people spending in a major currency.

Nice material possessions aren't a bad thing. Nice vacations are great, too. In moderation, they all can enhance quality of life. But don't tie your identity to those things.

3. purchase real estate (next best thing to stock market); it is not liquid, but is [usually] tax-beneficial
But it requires you to babysit it. And unless you're fabulously wealthy, real estate portfolios tend to end up underdiversified, subjecting you to unrewarded volatility.

Don't tie your money in the long run to your local economy. It's too undiversified, so it would subject your portfolio to high volatility in boom/bust cycles. Personally, I'd try to approximately index the world. You should also find someone with good financial knowledge from outside the major currency zones (ie not in US, Euroland, UK, or Japan) and discuss whether to (and if so to what extent) hedge currencies in your investments. Your considerations are different from those of people spending in a major currency.


Good advice from Mr. Chen

Look into foreign markets for diversification. Small cap, and regionally targeted international funds have been performing very well in the last couple years. Slightly more risk, but the rewards have been substantial recently.

^^^I would not specifically target regions. It would be very foolhardy to anticipate outdoing people who analyze where to invest for a living. And the regions Snuffleupagus alludes to are subject to boom/bust cycles that in comparison make Australia look like the most developed economy in the world. +100% in a year is not unheard of. Nor is -80%. Make sure you cover the major developed markets, and optionally participate (but not in excess) in the more volatile developing markets.

Places with large markets have large markets because the world's investors in aggregate put the most money there. Unless you have a good reason to do so, don't go betting against the aggregate since the bulk of the money is controlled by people doing this full time. Neither significantly overweight nor significantly underweight any significant segment of the market unless you really have a solid reason for doing so. (Not stomaching the volatility of the emerging markets and avoiding that segment is acceptable. It's a small percentage of the overall market anyway.)

(Not stomaching the volatility of the emerging markets and avoiding that segment is acceptable. It's a small percentage of the overall market anyway.)

Right, by no means am I advocating putting a large chunk of his savings into said funds, rather that they have a place in some portfolios.

Okay, gotcha. I know that some people do advocate such a plan. For the record, I do not shy away from the emerging markets. They currently represent about 5% of my holdings, making them ever so slightly overweighted, but essentially in line with their market proportion. (The percentage fluctuates a bit since I have one non-indexed mutual fund that seeks investments globally. It currently is somewhat overweight in the emerging markets.) I have a portfolio that essentially indexes the world's liquid and non-restricted equities markets, with little regard for what regions are "hot" or what regions are "risky".

As others said, max out your 401k, max contributions to an IRA, upfront if possible. The rest is investible and the others have given good advice. REITs are a good and lazy way of taking advantage of the real estate market so they're worth checking out.

thank you very much everyone!

I shall look into this in depth!

One challenge I have is that I have no investment role models. My mother raised my brother and I on $10 an hour. I still do not know how she did and am eternally grateful!

Consequently, I especially appreciate you sharing your knowledge on the subject!

He doesn't mention how old he is. Emotional make-up, risk-tolerance and earnings years left are major factors in determining the overall strategy... The risks that needs to be managed for and older person 10-years away from retirement is completely different from someone who's 25 with 40-years of earnings to go.

As for role-models, there are a tonne out there. Find someone who've achieved the results you want and ask them to be your mentor.

Ok, since nobody else is going to be it, I will be your lighthouse in a choppy sea of IRAs near rocky shores of 401ks. GO ON A HOLIDAY! You live in Australia? Go diving in the Barrier Reef (before it's destroyed). Take a trip into the outback and watch the stars. Go on a bike tour. Life is too short not to enjoy these things.

My personal philosophy is that money is made to be spent. :D

That said, there's some darn good advice above...

Firstly sorry I don't know your age but regardless of this I am concerned you don't have superannuation on your list of options.
If you are currently under 40 years of age you realize that there is very little chance of a pension when you retire. You should also look closely into "Salary Sacrifice" via a financial adviser. GET ONTO THE ATO WEBSITE and check it out also.

Hi,

I am 25 and already contribute 9% of my wage to superannuation.

I have been working 9 months full time with sporadic work previously to support me throughout university.

thank you everyone!

Max out retirement contributions and if you can swing it, set up automatic monthly contributions to whatever savings/investment vehicle you choose. You may want to pick a staging area like money market fund to build up cash while you research your investments. Also, it's no fun saving up all that money if you can't spend some of it so peel off a couple bucks here and there and stick it in the "whatever fund" to pay for vacations, bike parts, whatever. Have you drawn up a budget of your expenses to see what you need to live off and how much you can save?

Hi,

I have a loose budget which results in me saving approximately 40% of my net income currently.

I have been able to do this for 6 months so far but am wary that I would have to dip into this if a significant unforseen cost were to arise.

I have set aside 6 months living expenses that I shall not touch. Now I am focused on what to do now. I shall check out some of the above advice.

thank you!

Oh right, you mentioned your savings rate last time, but I had forgotten about it. It's great to save a lot, but make sure to enjoy, also. If you're in a long term situation financially (not anticipating going back to school or anything like that), you really don't need that high a savings rate. Something on the order of 30% is more than enough. Do enjoy yourself a little. You've earned it.

YOU'RE 25 YEARS OLD!!! GO ON A HOLIDAY!!! These are the best years of your life. Go have fun while you're young and spry. Save IRAs and 401ks for your 30s and 40s.

Good advice from Mr. Chen

Look into foreign markets for diversification. Small cap, and regionally targeted international funds have been performing very well in the last couple years. Slightly more risk, but the rewards have been substantial recently.


I am a complete novice. How do I find out and select these international funds.

What are their average returns before and after fees?

How does salary sacrifice work?

thank you

I am a complete novice. How do I find out and select these international funds.

What are their average returns before and after fees?

How does salary sacrifice work?

thank you

You should probably see a financial advisor.

Salary sacrifice works by you allocating pre-tax salary to your super (or other items such as laptops, cars etc...). Depending on your marginal tax rate it may be worthwhile to salary sacrifice into your super and you will only pay the 15% contributions tax. The downside to this is that you cannot touch your super until you are 65 and you will have to pay the 15% withdrawal tax. I did this when I was paying 48.5% tax i.e. when the top rate used to cut in at $50K (1997/98 I think).

As far as the resources boom in WA goes you are probably ok as after Gorgon is developed there will almost certainly be developments in Sunrise/Troubadour (8 tcf), Scott Reff/Brecknock (20 tcf), and it seems unlikely that the price of oil will plumb the depths of 1986 and 1998 again. Failing that there is lots of work offshore ie Africa, former USSR etc...

I really commend you for examining these options at your age! Very few people even consider savings and investments until it's too late. With the time available to learn and experiment, I suggest you make a lot of small mistakes to learn the lessons. Will pay off bunches later. :) Good luck!

thank you! Great responses all round!