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A one-page introduction to investing

Introduction: In last week's article on the predicaments facing financial advice, Rob made this comment:

"As someone who has seen the very best and the very worst of financial advice, I just shake my head at the complexity and the BS. Is total paranoia with protecting backsides and protecting consumers where, in reality, it does neither, so it is very frustrating! When complexity fails to improve outcomes, it is fatally flawed. I now have two >18 grandkids and set myself a challenge to give them an introduction on one page! Simplicity is always harder than volume, but if we can educate young people in the basics, they have half a chance to ask the right questions and look after their own futures."

We received many requests to see Rob's one-pager, so we asked him for a copy. Turns out he is Rob Garnsworthy, former Managing Director of Norwich Union Australia.   

Meeting a difficult challenge (and readers are welcome to send in their own ideas), here is the one-pager.

What are asset classes?

Essentially the broad name given to things you can ‘invest in’ – property; shares, which give you a fractional ownership of a company; bonds which are effectively ‘loans’ to companies or governments; then a whole range of things like gold, bitcoin [dumb], infrastructure, art, classic cars [!] and the list goes on.

‘Growth assets’ vs ‘safe assets’

In simple terms, property and shares are regarded as ‘growth’ assets – they ‘should’ grow faster than inflation – some do, some don’t. Over time, they have had very similar rates of growth BUT they can be volatile.

Bonds on the other hand have historically been regarded as ‘safe’ assets – returns will generally be lower but so will volatility. At times like this however, with all the geopolitical noise, Covid, Ukraine, China, nothing is particularly safe.

Know what it is

If you do not understand something, do not invest in it.

Time is your friend

At your age, you have time on your side. You can weather the ups and downs, you can stay invested through the down times, indeed that is always the best time to invest, and you can allow the ‘magic’ of compound interest to work for you. Take a long-term view with a well-constructed portfolio and you will be ok – 7-10% over 50 years is powerful.

Inflation is your enemy

Inflation ‘eats’ cash and spending power. It has been quiet for decades but now it's re-emerging. A cup of coffee that now costs you $4.50 will cost you $12 in 50 years if inflation rises at 2% per annum so the challenge is to have investments that increase faster than inflation – inflation + 4-5% is a good target.

Financial independence

Trust any government at your peril. There are two simple things you should aim for – to own your own home [lifestyle] and to be financially ‘independent’ [investment] in retirement. Tick both of those boxes and you will be ok.

Achieving the right balance

Rough guide – if your ‘lifestyle assets’ are approximately equal to your ‘investment assets’ at the point of retirement, that is not a bad balance. You cannot ‘eat’ your home. If you have investments around 20 times your cost of living, that is also not a bad target.

Superannuation

Super is not an ‘investment’ per se. It is a tax-advantaged structure that ‘holds’ investments. The trade-off is that you cannot access it until you are in your 60s. If you live with it day to day, you can manage it yourself. If not, a low cost professional manager is a better option.

Start your journey early

What we are doing here is but the start of a journey. By starting early and learning early, by going through cycles of euphoria and fear, you will learn. The challenge? To take responsibility for a future which is yours and yours alone.

 

Rob Garnsworthy is a retired former Managing Director of Norwich Union Australia.

 

26 Comments
Greg
September 03, 2022

I would also advise my grandkids to maintain a healthy lifestyle .
You can't accumulate wealth without good health.

Robert Legg
September 02, 2022

Make a GOAL and WRITE it out.
Then PLAN how to reach it and WRITE that too.

After paying 17% on loans for investments, inflation became my best friend.

Jim Garnsworthy
August 28, 2022

Been in the accounting, finance business for 40 years, agree with your commentary.

Brian Cuthbert
August 28, 2022

Thanks Rob, as you set out to do, you have covered the basics in a very simple form. I have taken a copy for my grandkids. Much appreciated.

AlanB
August 28, 2022

Two words of advice that have proven over time to cover health, wealth and happiness.
Marry well.

Graham W
August 27, 2022

All young folk will have a super fund once they start working. Surely the most important 'investment " is for them to always have adequate insurance cover in their super fund. Telling them they could get a large sum if they are disabled while they are young and were not covered by the circumstances of their accident is very important. No need to make payments to keep the cover going as long as there is sufficient money in their fund. Beats a Go Fund Me which could never pay for a modified home and car.

David Owen
August 27, 2022

As a financial planner now retired, I always remember the wise words from the Richest Man in Babylon, Unfortunately, most people miss the subtlety in the choice of just one word; i.e. "keep" money rather than "save" it.

Essentially, the book says: "When we are employed, we are "given money" in exchange for our personal exteriors. We then "give it away" as we purchase things to sustain our lifestyle. To develop and maintain financial independence, we should "keep" at least 10% of what we earn, guard it zealously and invest it wisely where it will create slaves who work for you."

Essentially, this suggests investing it in successful businesses. In some ways, it supports the concept of having a well diversified portfolio invested sensibly across defensive and growth based assets. Then, calling on Albert Einstein, let compound interest work for you.

soor
September 17, 2022

Best advice I have read

Trevor
August 26, 2022

In 1849 -1850 Charles Dickens published a 'serialised book' and a book called David Copperfield
There's a great quote from the book where the character Mr. Micawber says to Copperfield,
“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness.
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
So......anyone alive today and NOT AWARE of the merits of LIVING WITHIN ONES INCOME can not say they weren't warned !
Incidentally , IF Dickens' relatives had bought his first edition "David Copperfield " book , got him to sign it and kept it in pristine condition it would probably have cost them about A$1.70 to A$3.50 and they could "hand it on to their descendants" who could then sell it today for about A$95,000--00 . Not a bad return on such an instructive investment !

C
August 26, 2022

Good advice. The achieving the right balance bit needs to be adjusted for cities with expensive real estate. Imagine trying to pay off $3m mortgage while building $4m investment.

Jack
August 25, 2022

Some people like to feel rich, others like to be rich.
To feel rich, you spend all that you earn and borrow some more. You then become a slave to your debt.
To be rich you need to spend less than you earn and invest the rest. That way your money starts to work for you and if you start early, you benefit from compounding.
When the income earned by your assets equals you salary, work becomes optional.

Garry S F
August 25, 2022

Can I suggest just one other point:
It is not how much you earn but what you do with what you earn that matters.

I always tried to tell my kids to try and save 10% of what they earned, from when they first went to work as teenagers.

Pete
August 27, 2022

Great point Garry S F ! Many highly paid execs (I am told) have equally as high Credit Card balances !
Before you purchase something, ask if it’s a want, or a need !
Unfortunately, many let their emotions rule their Pocket !

Damien Morris
August 25, 2022

The unfortunate thing is that money, wealth, investing etc are complex matters and require much study before the essentials start to stick. Then crypto comes along and suddenly the fundamentals no longer apply, or so we are told. No wonder young people are confused.

DougC
August 25, 2022

Perhaps an additional point : "Money has 2 uses, for spending and for investing. If you spend all you earn, you’ll have nothing to invest and your money will continually decrease in value."
The reason I would suggest this addition is, from observation, many in Rob’s grandchildren’s age group seem only to know of the first use of money and, from their observation, would be unconvinced by the second purpose.
In their place, I too might think that it’s better to spend now (things will always cost more later); and what investment could possibly keep up with inflation.

Greg
August 24, 2022

yep - couldn''t agree more. Simple sensible advice. Investment is not that hard.

JD
August 24, 2022

not bad at all!

Aleks
August 24, 2022

How about 'if you don't understand something, educate yourself and try to understand it!'

John G
August 24, 2022

Great advice. A young adult also needs to understand that if they spend more than they earn, they will find it difficult to achieve their financial goals. Having a savings mentality will put them on the right track to prosperity.

George Darivakis
August 24, 2022

Good basic advice. It applies to all investors as often ephemeral short speculative bursts distract from investing , shifting to speculation and disregard of the basics. Patience with good companies and self education will always remain the best suggestions for our grandchildren.

Mart
August 24, 2022

Jeez Rob, why didn't you tell ME this when I was 20? Honestly, some people....

SUNIL
August 24, 2022

You can feel like a king if you aim for and achieve owning a fully paid home and superannuation balance of 25 times of your annual requirements in Australia.

Heather Traeger
August 24, 2022

Great advice .... how do I find a low cost professional manager ??

JAzz
August 25, 2022

Given that the heading is Superannuation, i would thinlk that the "best" initial option is an industry type fund. A low cost professional manager in the 'corporate' space has a slightly different agenda, thouigh they are of course working in your best interests. Ther are certaily low cost SMSF services providers available if you enjoy the control and fund management aspect

If you do go down the path of using a 'professional manager", know and understand what is being put on the table as it is yours and they only get a percentage.....win or loose.

Graham Wright
August 24, 2022

Absolutely great advice and timescale. If only we all could have known this and followed it. But since we didn't, we try to pack it all into the later years of work and try to extend retirement funds as far as possible.
So I would add the reinforcement:
> Start early and avoid the rush and all the issues that arise from rushing.

David Owen
August 27, 2022

I forgot to add one point of clarification to my previous reply.

To me, there is a significant difference between "keeping money" and "saving money".

When we "save", we are saving for something such as a holiday, a car purchase, renovations etc. When we "keep money', the objective is to hold onto and accumulate the money so as to create a portfolio that generates passive income to support your lifestyle.

If people grab this simple concept, it helps provide an uncomplicated pathway to the future.

I regret that I did not discover the difference until I reached my forties.

 

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