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What should i do with $5K?

Discussion in 'Investing Strategies' started by shu33, 20th Jan, 2007.

  1. shu33

    shu33 New Member

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    hi,

    if anyone can kindly give me some suggestions of how i can use my $5k wisely....:confused:

    currrently, this is all i have saved up so far to invest in. i want to start to invest in properties, but i have no experince what so ever!:eek:

    altho i have read lots of books on property investments, but still not very confident in actually putting them into action, so i am thinking of attending a property investment seminar.....has anyone attend any good ones that they can recommend me? :D

    just think that it's better to gain some knowledge in how to do it, then put them into action ( to minimise the risk) as compare to using it as a tution fee for my own trail and error. :)

    thank heaps
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    In general, I typically suggest to people the following:

    - if you have a specific goal in mind for the money (eg something you want to purchase or invest in) and you are looking to achieve that within the next 1-2 years, then I suggest just put it in a high interest account such as the (there are many other similar products around such as ING Direct).

    - if you don't have anything specifc in mind over the short term, and are prepared to invest over a longer timeframe, then perhaps consider putting your money into a managed fund or two - over the longer term you should get much better returns on your money than from a savings account ... but you need to be aware that over the short term, you could actually see yourself going backwards if the markets drop ... there's an element of risk that comes with those higher returns

    Have a look at Steve Navra's courses run through ... his investment structures course is very good - a lot of people here have attended and generally get a lot out of it. I don't think they have any scheduled right now, but perhaps you could call them and ask - they typically run several courses each year.

    You should also consider reading a lot of books - Jan Somers books are a good start for real estate investing.

    Hope this helps.
     
  3. Jacque

    Jacque Team InvestEd

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    Hi Shu- love the dog, by the way. Very cute :)

    I second Sim's suggestion as to maximising your holdings by investing them short term in something that's likely to return you interest of a reasonable nature.
    Unfortunately, $5K isn't a lot to get started in property, however, depending on where you are buying and what purchase price you're likely to pay, it will vary. If this is your first property, and you intend to live in it for a period of time to qualify for the FHOG, and along with your stamp duty concessions your out of pocket costs are going to be minimal (conveyancing costs).

    Depending on your income and your lender's risk assessment of your situation, you may be able to borrow more than 90% of the purchase price. However, for a first purchase, I would advocate saving as much of a deposit as possible to not only lessen the loan payments but build equity faster. Keep saving, reading as much as you can in the meantime, learning from others who've gone before, and ask lots of questions :D

    Good luck in your journey!
     
  4. -T-

    -T- Well-Known Member

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    Hey shu33

    I think the best way to learn is on forums like this one. Ask all of the questions you want because the people here enjoy teaching and talking about investing. The posters before me and others on this site seem to have a LOT of knowledge to impart and it's yours for the taking (for free!). Start with the fundamentals and then move to specifics.

    For example, first understand the asset classes (i.e. property, equities, etc), investment cycles (i.e. the cyclical nature of returns for each asset class) and the basics of taxation and the economy. Then maybe pinpoint where you want to invest and focus your research on that asset class. Also consider the structure you'd like to invest through when you do finally invest (i.e. individual, trust, etc).

    In terms of your quest to invest the $5k though, it also depends on your other cash flow. Is it just that $5k for the foreseeable future? If you have other reasonably constant cash flows, then you may be able to support a much larger investment, like a property or other geared investment.

    Anyway, good luck. :)
     
  5. shu33

    shu33 New Member

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    Thanks everyone for the excellent ideas.

    yes currently the money is saved in ING direct which is good.
    and from now on i will start to do some basic research like what you guys have suggest and keep on saving more money....many thanks

    ps: for -T-

    i was just wondering if you can suggests me on any books or materials that i can read or research on the topics that you have mentioned before.
    1. asset classes
    2.investment cycles
    3.taxation and economy
    4.structure of investment types.

    Thanks heaps :D
     
  6. -T-

    -T- Well-Known Member

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    Hey shu33

    Give me a day or two. I'm travelling interstate today, but I'll try to post a few links on those topics. I'll attach some interesting comparisons of the asset classes too.

    Others may have good links to resources too.
     
  7. shu33

    shu33 New Member

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    Thank you very much -T-...i didn't expect for you to reply this fast!! :D
    have a good fun interstate trip!!!

    please do take your time...as i will be heading off to library to look for Jan Somers books...that will be enough for me to get busy on!! :D

    Cheers
     
  8. -T-

    -T- Well-Known Member

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    Hi shu33

    Apologies for the delay; just lots going on and I have to go away again in an hour or so.

    Ok..... when you have a chance, check out the following things:

    1. Investment Concepts (a few very important topics for investing)
    - Risk vs Return
    - Compounding
    - Leverage

    2. Asset Classes (the categorisation of the areas in which you may invest)
    - Property
    - Equities (shares)
    - Fixed Income (bonds, etc)
    - Cash & Equivalents
    - Alternative Assets

    Have a look at the attachments; I have added a number that compare asset classes and their performance.

    3. Economic & Investment Cycles (how everything inter-relates)
    - Interest Rates
    - Inflation
    - Economic Growth

    Have a look at the investment cycle diagram that I attached. It goes a little way to explain the idea.

    4. Investment Vehicles (a bit about the structures you can invest through)
    - Individual
    - Trusts (discretionary, hybrid discretionary, unit, etc)

    I haven't put any links in yet, but you should be able to find stuff easily on google.com. If you can't find good info on a particular concept, just ask in this forum and you'll probably get quite a few responses.

    The most important concepts to understand are the first ones (risk, compounding, leverage). I've written a bit of a brief description below. You may already know this stuff, but check it out anyway.

    1. Investment Concepts
    a. Risk vs. Return - as with most things, to do better, you must risk more. To get around a race track quicker, you must go faster and accept a greater risk of crashing. The same is for investing. To receive greater returns (i.e. make more money) you generally must accept more risk. So what does accepting more risk mean? It means accepting a greater likelihood that you will lose money. When people say they are ok with high risk, they are saying they don't mind losing their money. People can twist it any way they like, but that's what it is. The numbers support this; you simply don't need high returning investments to become financially independent (depending on your definition, of course). $100k, 50 years and 15% returns will net you roughly $100 million! I'll leave it at that for you to ponder.

    b. Compounding - without compounding, you'd probably be better off concentrating on getting a better job to make more $. So it goes without saying (but I'll say it anyway), that compounding is the holy grail of investing. A quick illustration: you're playing golf with a friend, you decide that you want to put some money on the game. The mandate for betting is that you'll put $1 on the first hole and then double the bet for each subsequent hole. What's the bet on the 18th hole? A couple of hundred dollars? $262,000+ actually. That's compounding. That's what happens when you wait a bit of time and secure reliable returns over that period. In the first couple of years on investing, compounding with be virtually worthless to you. Let's look at it: you have $100k invested at a return of 20%. You make $20k the first year, so you have $120k. Then next year another 20% (on that $120k), a return of $24k. Only a $4k difference. But at year 10, when your original $100k is worth $620k, the next year (20% x $620k) returns about $123k; a whole $103k more than the first return. So in year 11, the $100k has grown to $743k. That's compounding.

    c . Leverage - so far we have shown an investment with a moderate return and equally moderate risk. We saw $100k grow to $743k in 11 years. That's cool; sort of. Let's say you managed to invest $500k instead of $100k. In a practical sense, you may have borrowed money from the bank or invested in something that doesn't require a full down payment. So what happens if you manage to invest $500k instead? A value of about $3.7 million after 11 years with the same detials as the above example. So leverage just helps compound the effect of compounding. But... leverage adds risk! Let's say your $500k investment falls 20% (remember $100k was yours and $400k from elsewhere, maybe a bank loan). Well your $500k goes to $400k. You owe the bank $400k, so guess what happened to your $100k? Gone. You’ve effectively lost 100% of your investment with only a 20% decrease in the investment because of the power (in this case a negative power) of compounding and leverage. Food for thought, but leverage can still be very cool if managed in consideration of the caveats.

    Good luck! :)
     

    Attached Files:

  9. -T-

    -T- Well-Known Member

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    FYI: the first attachment is based on the years '82 - '05.
     
  10. Glebe

    Glebe Well-Known Member

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    - T -,

    What time do you think we are at the moment?
     
  11. -T-

    -T- Well-Known Member

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    To be honest, i have no idea. it seems as if things aren't as cyclical as these clocks make out. you seem to know your economics, what do you think? if i had to pick something, i'd say we are ramping up to a cash cycle, but that's pretty vague. in my optimistic and uninformed view, it will be a soft landing. :)
     
  12. voigtstr

    voigtstr Well-Known Member

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    if the goal is negative geared properties plus managed funds (postive geared) with the cash flow from funds supporting the properties, whats the best way to get started? Do you continue saving (perhaps in ING direct or similar) and get the investment property deposit and purchase cost cash sorted out, or is it best to use a savings plan with managed funds (eg navra) and then wait until a certain percentage will cover the investment property?

    Who has been there and done that?

    I'm currently paying off consumer debt (will take till october at the shortest, next feb at longest I think), have a 180k unit with 170k owing (it might be worth 190 now)

    When that consumer debt has cleared.. is it better to start with managed funds if the goal is to have a sizeable chunk of money in funds later on to assist with meeting the shortfall of owning investment properties?
     
  13. -T-

    -T- Well-Known Member

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    voigtstr: if the fund produced stable returns that were substantially better than a bank account, one would assume it would be best to get your cash into the fund because it would return more. You could apply the same thinking to your consumer debt too. If your credit rate was 10%, but you could gear your money to 70% and make a 12% return from a fund, then you'd benefit more by investing in the fund than paying off consumer debt.

    BUT... paying off debt is risk-free, an ING account is virtually risk-free and equity funds are anything but risk-free. So while you have to take risk to make money, it's up to you personally to gauge what you're comfortable with. Everything is risk vs return. When you decide you want higher returns, you are also deciding you want to take on a greater risk of losing money. That's just how it is.
     
  14. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I got started by 1. paying off personal debt, 2. saving money in a high interest savings account, 3. buying property, 4. building equity, 5. borrowing against that equity for more property, 6. rinse and repeat
     
  15. voigtstr

    voigtstr Well-Known Member

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    I'm happy to pay off consumer debt this year for the cash flow gains later.
    Delayed gratification.

    Now for actual investing, happy to take some risk.. my thoughts are if the unit price of a fund dips then it gives me more units per batch that I buy.

    Say I start with $1000 for the retail navra fund and make a minimum of $250 per month after that (in reality it will be more because of the cash flow from paying off the consumer debt) if the fund dips then I get more units for my $250 per month. As long as the fund doesnt tank altogether, then averaging of unit prices will be fine. If the fund collapsed somehow, I'm still young enough to start saving again.

    So if I saved using an installment plan with the navra retail fund, at what stage would people withdraw cash for an investment property? if the IP deposit was X, would people save up to 2X or 3X or some other factor so that the fund dividends would assist with the ongoing IP costs?
     
  16. voigtstr

    voigtstr Well-Known Member

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    where did the the funds for extra cash flow fit in?
     
  17. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    After step 6.

    I kept buying property until I used up my servicability (I hit my own limit before I hit the banks limit), then drew down equity to invest in funds to improve my cashflow.

    Not saying this is how you should do it - just how I did it.

    It takes time - we started saving for our PPOR in 1996 and purchased in 1998 (became an IP later that year). We bought our IPs in 2001, so got the benefit from the property boom - which helped. Funds came in 2003. Margin loan in 2005. If things go well, semi-retirement in 2008.

    The key to building wealth is leverage. You can get far better leverage on property (I go to 90% LVR), meaning you can get more asset working for you sooner.

    Margin loans you can only go to 70% LVR or so - and even then you don't really want to gear that high because of the volatility of the markets increasing the risk of a margin call.

    In my opinion, you won't achieve terribly much by just investing in managed funds without leverage ... you simply can't get much return from your own capital. Of course that depends on your goals ... if you are just wanting a new car or a nice holiday - we're not talking about much money ... but if you are talking about building an asset base of $5m+ to retire on, then you need to get some serious (but safe) leverage happening, and I say property will get you further more quickly (depending on where the market is at).
     
  18. voigtstr

    voigtstr Well-Known Member

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    what about the interest payments on the margin loan?

    do the fund dividends generally cover the interest payments? If the goal is to have extra cash flow for funding IP negative gearing, the interest on the margin loan wouldnt be helping?
     
  19. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Depends on the type of fund - if an income fund (eg Navra), they generally pay out most of the profits in cash distribution, but that's not necessarily the most tax effective mechanism, so I also use growth funds. My goal is to have total return (distribution + growth) well and truely exceed the cost of the margin loan over the longer term (short term fluctuations are acceptable).

    Most people capitalise margin loan interest (pay the interest out of the margin loan itself), which helps with cashflow too ... although you need to be careful with this strategy as capitalising interest increases your LVR ... if your funds aren't growing faster than your interest accumulates, you will be going backwards.

    If the funds aren't generating enough returns (over the medium term) to easily cover the cost of the margin loan - you have the wrong funds !!!

    Typically the recommendation is to gear to around 50% LVR to minimise the chance of a margin call - so if you are paying 9% interest on your margin loan, you really only need to get 4.5% return to cover that cost. I think you should really be aiming for at least 10 - 12% return, possibly much more (depending on your strategy).

    If you have a decent cash buffer, you can also afford to gear slightly higher - you can use the cash to pay out a margin call if required ... to prevent you being forced to sell down fund units during a down period in the market.
     
  20. voigtstr

    voigtstr Well-Known Member

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    I think its all starting to form in my head properly now :)

    Would saving up to 10k in navra be a good start and then when I hit 10k get a margin loan for another 10k.

    I'm thinking it would be better to have the extra cashflow from dividends from the fund, before buying the IP, so that my cashflow isnt negative from the IP.

    Then at some stage when there is enough in the fund I could withdraw some cash for the deposit and purchase costs on an ip.