What if accessing your super increases to the age 70? An interesting thought to consider.
If recent speculation in the press is correct, the pension age will increase to age 70, and access to your own superannuation will also be increased to 70. In turn, this raises the importance of taking responsibility for funding your own retirement.
An important consideration in being able to fund your own retirement is the return you need to achieve from your investments.The price you pay for investments can have a significant impact on the return you achieve on your long term investments. It goes without saying that the higher return you receive on your investments, the faster you will be able to achieve your long term wealth creation goals.
For example, if you achieve a return on your investments of 7% per annum, you will double your investment every 10 years. Whereas on the other hand, if you achieve a return on your investment of only 3.5% per annum, it will take you approximately 20 years to double your investment.
Despite this fundamental principle of investing, investors are often mislead by the following three investment myths:
- Negative Gearing
The Australian taxation system is one of the few countries in the world which allows negative gearing. On an annual basis, the cost to the government to fund negative gearing is estimated to be $8 billion. Negative gearing, when combined with an equally generous capital gains tax system, encourages investors to ignore the fundamentals of investing in their pursuit of a tax deduction. Investors are also being enticed to borrow to invest using their superannuation savings and frequently ignore the risk associated with the underlying investment.
Taxation legislation is subject to change depending on the economic and political events and to purchase an asset based solely on its taxation advantageous is risky. Several reviews of our taxation system have recommended that negative gearing be abolished. Whilst this does seem not seem likely in the short term, it is still possible in the long term as the government of the day seeks to balance its budget.
I often see investment strategies which comprise 10 to 20 so called “blue chip” Australian shares, cash and property. Investors and their advisers are comfortable in owning household brand names. Whilst these may be solid companies to invest in, it is still important to understand the price you are paying as it will impact on the return you receive on your investment. During the Global Financial Crisis (GFC), investments in blue chip companies decreased in value in some instances by over 50%. Whilst some of these investments have now recovered to the pre GFC levels, others are still languishing at 50% of their pre GFC levels. To have an investment strategy solely comprised of blue chips without examining the underlying fundamentals of the companies you are investing in, may result in your return from these investments not being enough to achieve your goals.
Bricks and Mortar
Australia has a long love affair with real estate and a common investment myth is that there is nothing safer than bricks and mortar. Bricks and mortar investing is frequently combined with another investment myth already mentioned, negative gearing. The outcome is that investors borrow heavily to invest in real estate on the basis that the price will always keep going up regardless of economic and political events. Investing in real estate is just like any other investment, the price you pay for the investment will have a large impact on your future returns from the investment. It is important to do your sums beforehand to see what capital gain you actually need to compensate for the all the years you are going to experience a negative return on your investment.
Before investing in blue chip shares, bricks and mortar and using negative gearing, it is important to understand the return you require to achieve your long term wealth goals. It may be possible to achieve your goals by taking less risk and achieving a better return.
Please contact me if you would like to review your investment strategy to make sure you are maximizing your risk adjusted returns and not being seduced by these investment myths.
Disclaimers & Disclosures
Geoff Ivanac is Sub-Authorised Representative No. 000309751 of GPS Wealth Ltd (GPS) ABN 17 005 482 726 Australian Financial Services Licence (No 254 544) and can provide the following services financial planning, risk management, managed investments, superannuation and retirement planning, margin lending and self-managed superannuation funds.
The information provided on this website has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your GPS Wealth Ltd (GPS) Adviser before you make any decision regarding any products mentioned in this communication. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither GPS nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.