“I'm 28 years old and my only debt is my mortgage. I have a few thousand I was looking to invest. I'm seeking investment options that offer both security and high returns."
-Question from Rajesh in Brisbane, QLD
Top answer provided by:
David Marginson
Hi Rajesh,
Thanks for your question about seeking investment options that offer both security and high returns. At 28 years old with your only debt a mortgage and a few thousand dollars to invest, you are clearly progressing on your investment journey.
As a start, I would recommend you investigate the Australian Government provided Moneysmart website. This has a lot of practical information and guidance that could assist you on your wealth creation journey.
With clients I would normally ask what are you investing for? Until you understand why you are investing you cannot be clear on what type of investments you should invest in. Different investments come with different risks and some will prevent you from accessing your funds in the short term, if required.
Clients often have short term, medium term and long term goals. The Vanguard Index Chart gives you a good idea of typical investment returns by asset class over time and is available by Googling Vanguard Investment Chart. Please take note of the volatility of returns for different asset classes as often investments will not only increase in value but also decrease!
Short term objectives could include building an emergency fund of 6 months of living expenses, buying a new car in 12 months’ time, paying for a marriage or the costs of a new child. Everyone has different short term investing or saving goals. If you wish to invest for the short term then I would recommend investing spare cash in a mortgage offset account. Mortgage offsets reduce the interest on your outstanding loan balance and the funds are immediately available if required. It is also possible to add to the funds in the offset account whenever you wish. If your mortgage interest rate is 6% then this is a guaranteed 6% return and no tax payable on the income. When you have built sufficient savings to meet your short term needs then you could consider medium term goals.
Medium term goals, in the next 5 to 10 years, could include education expenses for children, saving for the deposit on an investment property or overseas travel plans. Again everyone has different goals. To invest for medium term goals you are more likely to be taking on more investment risk. If you accept that the return you achieve is a function of the investment risk you are prepared to take on then you will realise that security of the investment with high returns is not always possible. As you move away from the defensive investments of cash and fixed interest like term deposits investment risk increases. If you are willing to engage in investment risk then you may like to consider investing in an exchange traded fund.
Exchange traded funds (ETFs) invest in a basket of shares and can be purchased on the Australian Stock Exchange (ASX). As the ETFs are sold as units it is possible to sell part of your holding, and buy other units at any time. Generally trades are settled within 3 days. There are many different types of ETFs and given many of them track the share market their value will rise and fall as the market rises and falls. There are also some ETFs which target highly specific investments so have increased investment risk and include a chance to lose some or possibly all of your funds. Generally I would favour investing in the Australian share market and in overseas markets. Like all investments you would be wise to do your own research before investing. Two ETFs which are available (but these are not recommendations rather simply an example of ETFs) are:
Vanguard Australian Shares High Yield ETF (ASX: VHY)
At time of writing this, this ETF has $AUD 2.89 billion invested in it and a dividend yield of 5.8% with quarterly income distribution. Over the last 12 months overall return, including capital growth is over 5%. This ETF invests in 72 different companies and focuses on high dividend paying stocks listed on the ASX.
For international exposure:
Vanguard MSCI Index International Shares ETF (VGS) has $164.3 billion invested in it and a dividend yield of 2.07% and a gross return including capital returns of closer to 15% for the last 12 months. This ETF invests in over 1467 companies across multiple countries.
Longer term goals could include having enough funds to have a comfortable retirement. Often this will involve investing in superannuation. Given the way you contribute to super can often also come with tax benefits when you invest, it is possible to increase your return with tax savings. It is also worth keeping in mind that $10,000 invested into super at 28 could generate a tax saving outside super of $3,450 for someone on the average wage. While, if invested at a 7% return in superannuation will grow to over $80,000 by the time you are 60 and can access your superannuation. However, money invested in super is not available until you meet a condition of release normally over the age of 60 so at 28 investing in super is a long term investment.
So to summarise Rajesh determine what you are investing for and over what timeframe before deciding what types of investments you wish to invest in. And please remember the higher the return forecast for the investment the higher the investment risk you are taking on! And with investment risk comes the opportunity to lose some of your money!
All the best for your investment journey.
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