Some advice please

We are in our 20's with a child, living in Sydney... Unable to afford to purchase a house anywhere half liveable we have been putting a little cash away into a high interest savings account.. We wish to stay in Sydney for our child's schooling and were wondering what to do with our savings seeing though it isnt going to go on a mortgage any time soon.. We were thinking possibly a share portfolio (possibly the first investment in LPT's??).
What does everyone think..
Cheers

 

I don't think you will find many members here who don't invest in shares directly or indirectly.

I do.

The devil is in the detail. As to whether LPTs are the best prospect in today's market is a tough call. I don't invest in them though not for any obvious reason.

If you decide on shares then you need to strike a balance between focussing on several good stocks and diversifying just for security - I am of the belief that to overdiversify is to chase a diluted result.

Research followed by decision - that seems to be the strategy all successful people employed ...

 

Hi FryBoy,

A lot of people would argue that this is the optimal investment strategy in the current environment. In fact some would argue that's too risky and you should be in gold instead, but that's a tad too bearish for my liking.

If your strategy is long term, then the share market is a good way to accelerate initial savings until you can afford a deposit on a house. That's whay I did, and paid $270K deposit on my $650K house on the Northern Beaches. That house is now worth $830K according to the bank's recent valuation. But it took me years to build that deposit and a lot of renting whilst I waited.

Cheers,
Michael

 

FryBoy,

Just make sure that you're aware of the impact of tax and inflation on your high interest bank account.

If I assume that you're on a 31.5% marginal tax rate, then 31.5% of your interest earned is to be paid to the ATO. And with inflation, you may be worse off still...

So if you're getting 6.8%, then you're really getting 68.5% x 6.8% = 4.7%, but inflation is around 2.7%, so you end up with about 2% 'real return'.

Sure, a high interest savings account is better than cash under the mattress! But there's a reasonable likelihood that a 2% real return will not allow you to keep up with property increases, and you might be saving for that house indefinitely!

Please don't let this post freak you out. I certainly cannot offer financial advice, but I can say that you've made a very wise choice by posting on this forum. Here you'll find lots of people that have learned a lot of lessons, and the (sometimes heated) discussions here will expand your investment and financial understanding.

I assume that you're able to leave the cash in the savings account, and let the interest compound (rather than letting the interest turn into a 50" LCD TV!). When you get to a useful threshold, it might be a good idea to start investing, maybe shares, LPTs, or managed funds.

What the?! What's a 'useful threshold'? Well it's an amount of money in the savings account that you feel can get you out of any trouble that might come along. This is really a part of an assessment of your risk tolerance - this sort of discussion can only be handled by a licensed financial planner.

But my simple - and unlicensed! - opinion is to have a cash buffer that might see you through a rough patch, eg accident, redundancy,... I personally use 3 months gross wages as my cash buffer.

Note that having a cash buffer (in my case it is 100% offset against my PPOR - a prudent interest-saving tool) is also an effective 'cash investment'.

With a cash buffer / investment in place, the rest of your surplus cash may be put to work in growth investments.

(I like having a cash buffer, so I know that I won't need to cash out any of my growth investments in an emergency, since you cannot predict the exit price of a growth asset - it might be a good time, like mid-July, or a crap time, like mid-August!)

LPTs pay consistent yield, somewhere around 6%, but there are no franking credits from LPTs. But a % of the dividend is tax deferred which means that you don't have to pay income tax on this component (unlike bank interest!), but you will have to pay tax on this component when you sell (part of the capital gains tax calculation).

I like LPTs as a concept, as they allow you to buy real property without having to spend $500k! And there is no stamp duty, agent's fees, cash out in 3 working days, sell part holding, etc. And they grow in value, as the underlying property grows in value.

I personally hold BWP, Bunnings Warehouse Property Trust; 5.7% yield, 24% tax deferred, so closer to 6.3% gross yield for income tax purposes.

In other words, BWP at 6.3% is comparable yield to the high interest savings account, but its yield increases with CPI, and the share value grows with property values! Strawberries and double-thickened cream.
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I'm not going to go on about shares vs managed funds vs LPTs, but if it counts for anything, I have 75% : 10% : 15% respectively. Many other people on this forum advocate managed funds.
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High interest mortgage-backed securities, CDOs, etc?
PLEASE BE VERY WARY OF THESE, EVEN IF A FINANCIAL PLANNER SUGGESTS THEM!
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Hope my two-bob helps. Good luck!
- Rod

 

Thankyou all for the great advice.. It is much appreciated.

 

Hi Fryboy,

Just wondering how much you have in savings at the moment, and how much you can potentially put towards either savings or a mortgage each month?

You don't have to answer but perhaps we can suggest something to match your finances..

 

ouch, imagine the amount of IP's you could buy at 90% LVR with that money!!

You could gear that into the market and get $700,000 worth of shares..

You should take the buffet approach.. live in a simple cheaper house...

 

Mike's minimised his non-deductible debt pretty damn quick and has used the equity in his PPOR to fund further investments. His approach seems right on the money to me.

 

You should employ a handful of quality geared managed funds and contribute as much as you can on a monthly basis. Take a 5 year view.

I think you should split 50/50 between shares and property as both are good.

Gearing is important to magnify your gains (or losses).. and if you hold a 5 year view.. gearing is a great way to grow your wealth... just like you borrow to buy your house,, same way the fund borrows on your behalf to buy shares/property.

 

Hi Mike, perhaps a plan with a managed fund where you contribute a regular amount from your wages might suit better than using the high interest bank account. CFS australian geared share fund allows you to invest with a minimum of 1000 and then contribute whatever your budget allows on monthly basis, so perhaps 100 a month or a little more, you can also electronically transfer small amounts when ever you want.

Just be aware that with such a fund the unit price can go backwards quite easlily as well (but overtime they are aiming for growth). Check the graphs and if you try to buy in see if you can buy in on a dip.