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I’m 42 and work for myself. Business was going well, until Covid hit. Now, it’s slow, and I don’t know how long this will drag out for. I’ll still earn about $150k this year, but that is a third of what I was earning.
I have $320k in savings and get about $250 a month interest on that. A mortgage of $760k on a $1.2 million home at 2.65%, and no other debt or investments.
My partner, in her 30’s, earns about $190k. But, between us, we only have about $150k in super.
I would love my savings to start making money. Should I invest in property, or shares, or would I be better paying off half the mortgage?
My goals – well, I guess I want to be rich, with a few properties perhaps and be able to retire early. What do you think? What would a wealthy person do?
Thanks Aussie Advisor,
Firstly, I am sorry to hear you have been negatively impacted by COVID-19. This year has been about persistence and innovation, so getting your finances in order is a great first step.
You have mentioned your combined super with your partner to be worth $150,000. With this, I assume that you plan to begin this investment journey together, and not independently.
Should you invest, or pay down debts?
The questions you have asked are quite particular; should you invest in property, in shares, or should you pay off half of your mortgage? Instead, let’s reposition this question.
Should you invest, or should you pay down debt?
Given the information shared, I don’t see any majorly burdening debt aside from your outstanding mortgage. Furthermore, despite the circumstances, you have insinuated your mortgage to be currently manageable. Whilst any debt that is non-deductible is traditionally considered to be bad debt, I wouldn’t consider this mortgage to be a negative. Paying off $320,000 would reduce your mortgage repayments and accelerate some of the principal reduction in the long run, saving you a substantial amount of interest over the life of the loan.
Alternatively, we could explore opportunities to invest your money, be it in property or shares, which could grow your wealth by around 5% (based on a conservative investment earnings estimate). Ultimately, do we want to save 2.65% or earn potentially higher than that?
Property or shares?
In this age-old question, I would commonly suggest clients consider all opportunities and not limit themselves to these asset classes alone.
For example, there are property securities, hybrids and fixed income investments, like bonds, as well a vast array of managed fund options offering anything from the basic index funds, right through to atypical styles of investing.
However, as you have mentioned property and shares specifically, let’s focus on options surrounding these for now. In both my opinion and experience, shares and property have an equal place in any strong investment portfolio.
Property is an expensive asset to own from the outset. For example, let’s say you have a hypothetical $300,000 saved in cash, and look to buy an investment property without a mortgage. After paying the numerous fees and costs incurred in the purchase process of the property, such as conveyancing, stamp duty and rates, the value of the property you are looking to purchase with the remaining cash would be around $275,000 to $280,000.
Alternatively, if you, instead, choose to purchase shares instead of property, your $300,000 share portfolio would only incur brokerage fees, leaving you with a portfolio of circa $297,000.
Check in on your super
The superannuation saved between both yourself and your partner appears to be somewhat on the low side if we consider your typically earned salary until recently, your partner’s salary and your ages.
There could be a variety of reasons for this, including market fluctuation, so I wouldn’t say it is overly concerning. However, I do suggest taking a little time to review where that superannuation is and researching previous years’ performance. By understanding the average growth rate over the past five years, you’ll establish a pretty solid position on your super’s performance.
If it’s below 6%, you could look to chat to a financial adviser about rebalancing the amount of growth assets you both own. You’re both between 20 and 30 years from retirement age, so taking a little more risk now, and using time to reduce your volatility, could see you grow that retirement balance considerably more.
However, Covid-19 has seen markets drop slightly, and likely your investments in superannuation too. You should expect to see that balance come up again over the next 20 years without too much concern, but bear in mind that business cycles, which take place every seven to 10 years, could see your super drop in value again at least another three to four times in your working life. You should also remember that, given that your partner is considerably younger than you, she will have a slightly higher tolerance to risk and could, theoretically, work up to 10 years beyond your retirement age.
Here’s your strategy
So, that brings us to your question of “what would a wealthy person do?” Well, most of my high-net wealth clients have a diverse portfolio of both property and shares.
As mentioned, whilst slightly low, the balance of your combined super funds is not overly concerning. However, consider giving your superannuation fund a call and ask about their investment options and a rundown of the fee’s you’re paying. Fees are the most common reason for lower than expected super balances.
If your fees are over 1.5%, I would ask the question of why you’re paying so much. Your key focus is to ascertain the percentage of your super balance in growth assets as opposed to defensive, or income, assets.
Your risk tolerance is a measure of the level of risk you’re willing to accept as an investor. When considering this tolerance, we take into account several factors including, your age, your investment experience and how long your money will be invested for. Based on this we can ascertain what percentage of your total investment will be placed in defensive assets, and what percentage will be placed in Growth assets.
Based on your age, you may like to speak to a financial advisor about exploring closer to 80% in growth assets. However, this could change based on your own personal tolerance to risk, ascertained by your advisor. Again, bear in mind there is a considerable amount of time before you need access to this money. Time will reduce the risk of volatility for you, as opposed to someone who is 58 and requires access to their super in two years’ time. Over the next few years, as your combined super balances increase, you could consider a self-managed super fund under the review of a financial advisor.
Property versus shares? Well, why not both? You may look to use $100,000 of your current savings as a deposit for an investment property valued around the $500,000 mark. Most real estate agents will be able to assist with finding a good property to purchase but look for something in an area that historically shows good growth and an objective of 4% to 6% rental yield. $200,000 could, then, be used to start building a share portfolio.
The remaining circa $20,000 could be kept in cash as an emergency fund.
This should allow you a strong diverse portfolio, with a deductible debt. Always remember that borrowing to invest can not only magnify your profits, but also magnify your losses.
Alternatively, you may like to consider putting your $320,000 against your mortgage, either by repaying or placing it in an offset account. This would reduce your monthly repayments from around $3,477 to roughly $2,017. This saving is in comparison to a total investment portfolio of $700,000, drawing an average annual income of around $28,000, based on 4% per annum, not including annual growth.
The Aussie Advisor
Brendan Gow, The Aussie Advisor, is a Senior Private Wealth Advisor. Prior to his current role in a leading Private Wealth Firm, Brendan worked in financial advice across banks and institutions in Australia, and spent four years in Dubai as a Global Investment Advisor. With over 15 years of experience in wealth and financial management, Brendan delivers investment advice on a wide range of areas, including equity trading, portfolio and risk management, margin lending, bonds and fixed interest.
Brendan Gow, an authorised representative (no. 427470) of Shaw and Partners Limited AFSL236048 (the “Aussie Advisor”). This article has been prepared without taking into consideration any investor's financial situations, objectives or needs. Accordingly, before acting on the advice in this article, if any, you should consider its appropriateness to your financial situation, objectives and needs. Every reasonable effort has been made to ensure the information provided is correct, but we cannot make any representation nor warranty as to the accuracy, completeness or currency of that information. To the extent permissible by law, no responsibility for any errors or misstatements is taken, negligent or otherwise. Shaw or its authorised representatives may also receive fees or brokerage from dealing in financial products, see Shaw’s Financial Services Guide for information about the services offered by Shaw available at http://www.shawandpartners.com.au/.
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