Jonathan Philpot, a partner at HLB Mann Judd Wealth Management NSW, says investments paying more than “cash-style” investments always entail taking on more risk with your capital.
There are investments offering higher returns that are promoted as being just like having the cash on deposit with a bank.
However, money on deposit with “authorised deposit-taking institutions, (ADIs)” such as banks, mutual banks, credit unions and building societies, are covered by the federal government’s deposit guarantee, at least for the first $250,000. Those investments from non-ADIs are not covered.
Philpot says there has been a spate of investment schemes that have gone bust where one of the primary reasons for investing was the tax advantages.
There has been a string of failures of tax-effective agricultural investments and timber plantations, where the schemes provided a loan where the interest and management fees could be pre-paid before June 30, to help reduce the investors’ income tax liability.
Philpot says the best tax-effective investment remains superannuation.
Philpot says chasing the latest investment trend is “usually a recipe for disaster”. There has been a host of fads with a specific investment theme that have burned investors’ money, he says.
All big booms come to an end. “Anything where prices have shot up sharply are generally best avoided,” Philpot says. Usually, the market has already priced in the investment’s potential.
“Generally, when friends, family and taxi drivers start talking about a particular investment, it is a fad and should be avoided,” Philpot says.
Returns after expenses
Richard Felice, financial planner and co-founder of Belay Advisory, says investors often look at headline investment returns without giving enough consideration to fees and other costs.
Money has been lost though the erosion of capital by high fees, he says.
It can be worth paying a bit more for high-quality investments but, ultimately, it is net return after fees that matters, rather than the headline rates, Felice says.
Keep it simple
Do not invest in anything that you do not understand, Felice says. Complexity in an investment, including its fee structure, puts an investor at a disadvantage.
“We never [recommend] things that we do not understand,” Felice says. “We feel strongly about that – if we don’t get it, we just don’t do it.”
“You need to understand the risk and how the returns are being generated,” he says.
Financial planner Aynsley Jurson, founder of Jurson Advisory, say that diversification remains the best way to reduce investment risks. That means splitting your investments between various asset classes and market sectors – not just within a single investment type, such as the big-four banks.
Diversification is effective only if the assets are not “correlated” with each other; that is, where their prices do not go up and down together, Jurson says.
When you diversify, if one asset class is not doing well, the other investments should be able to compensate, she says.
Writes about personal finance for The Sydney Morning Herald and The Age.