How to Build Your Super With Easy Investment
Do you diligently put a portion of your income (usually 10% to 15%) into a compounding interest account?
If not, you should.
But is saving the only (or best) way to set yourself up financially for the future?
Definitely not. There’s a much better way—investments.
What’s the difference between saving and investing?
When you put money into a savings account, all you’re doing is keeping cash. Again, this is not a bad thing (especially when you account for compound interest).
Investing is placing money into a security or asset where, over time, your money will (ideally) increase, and you can retrieve it in the future.
The critical difference is that investing will bring much higher returns than a simple savings account.
Where can you invest?
There are a few ways to invest.
One is by investing in “debt instruments” or “fixed income instruments”. These are assets that require a fixed payment by the debt holder, like bonds, mortgages, government debt, or company debt.
Investing in debt instruments is lower risk, especially if it’s government debt. When investing in government debt, you have the full backing of the government. That full backing of the sovereignty, and the creditability of the government, means that the value doesn’t move very much; it’s a very stable income.
Second, there’s equities or the stock market, which includes all stock market, investing, and shares. It’s what you hear about on the evening news when they’re talking about the Dow Jones.
Lastly; the property market. You’ve probably heard of, or are friends with, people who are doing well by investing in various properties or just their own property.
Why should you invest rather than save?
Whether you should invest or save depends on your age. Younger people need to think long-term about saving for their future.
It’s tempting to forget about your retirement when it’s 40 or 50 years away, but now is the BEST time to consider what will get you the best return by the time you’re ready to retire.
By investing early, you can ride out the volatility in the stock market.
In the stock market, things go up, and things go down, but over the long-term, you will get significant returns.
Compare that to someone who is a few years away from retirement.
If you’re near retirement age, you will need that money in a few years, and you probably don’t want to risk being on the stock market.
Imagine if, six months before your retirement, something like the GFC or a pandemic happens? Your retirement fund might be obliterated.
But if you need your money in 20, 30, or even 40 years, you should be investing heavily in the stock market.
How does investing early help you avoid volatility?
Volatility usually refers to the “risk” a stock carries, or it’s potential to go up or down.
All investments have volatility—even Apple.
Say you invested in Apple because you believe it will go up over time. You would have been right; Apple has gone up, particularly since the invention of the iPhone.
But since Apple entered the market, it has had both ups AND downs.
Sometimes people are worried that Apple stocks are overpriced.
If you invested money while Apple stocks were high, and suddenly people are worried about whether it will continue to do that well in the future, the price of the stock may go down.
In that case, if you needed to sell and sell quickly, you could have lost money by investing in Apple.
Some stocks can go out of favour completely.
Think about Blackberry or Nokia.
Before the iPhone came out, everyone was going to Blackberry or Nokia. Then, all of a sudden, the iPhone came out and killed Blackberry.
Nokia did exceptionally well during the 90s. Then out comes the iPhone—Nokia died.
If you invested solely in Nokia or Blackberry, you would have suffered massive losses.
That’s why, when I talk to people about investing in stocks and on the stock market, I tell them to be very careful.
Investing in single stocks is taking a HUGE bet, even for very well-informed people.
A lot of well-informed people believed Nokia was going to overtake the world. And it did, for a brief time, but then something happens, like the release of the iPhone, and people single-invested in Nokia became exposed very, very quickly.
Even stocks that do very well over time have volatility.
What matters is the trend over long periods.
So, the longer you are in the stock market, the higher your chances of bad stocks recovering, and bringing you a great return on investment.
The shorter the time, the more likely you are to fall victim to a stock dip, or a big market crash.
Does that mean your investments should change over time?
If you start investing early, at a young age and early in your investing cycle, you should invest heavily in stocks.
As you move into retirement stage, you should reduce your stock investment, and your investment should move to the more boring instruments like government debt.
By switching your investments, you get the best of both worlds—high returns when you can afford it, and increased stability and cash as you get older.
Your retirement fund will be much more secure.
What’s the best way to invest in the stock market?
If you want to invest in the stock market, look at indexes.
An index is a wide range of stocks that represent the viability and value of an entire country.
The two you’ve probably heard of is the ASX 200 and the S&P 500. Australia has the ASX 200. The S&P 500 represents the US economy. If you put money on either of them, you’re going to be safe as houses.
It’s proven that investing this way is safer and more profitable.
In 2007, Warren Buffet put out a bet to the entire hedge fund industry. He bet that over 10 years if he invested in the S&P 500 and someone else invested in hedge funds, he would beat them.
Warren Buffet won to such an extent that his competitor conceded defeat six months early!
That, to me, shows just how unbeatable indexes are.
There are still some nuances you may want to think about when investing in an index, like which country is best for you. For one person, it might be best to invest in Australia, for another it might be the UK or Europe.
But the BEST thing about investing in an index fund is the lower fees. With an index, you don’t need to pay the money managers.
An index is low fees, simple, and very profitable.
How do you set up and start investing?
It’s simple to start investing.
You can invest through your super.
I recommend everyone check their superfund (especially if you are in a company-chosen fund), and either change their risk profile or change funds altogether.
Because you might be losing hundreds of thousands of dollars there.
When you take charge of your super, you can adjust your level of risk (or how volatile the stocks you are invested in are) to align with your stage in life.
If you struggle, and some people do (no shame!), you should speak to a financial advisor.
If you’re overwhelmed by all this information, you should remember these six key things.
- Having a savings account is great, but you should also invest in building wealth for your retirement.
- Invest as early as you can.
- When investing at a young age, consider volatile stocks for the best long-term results.
- When investing closer to retirement age, stay away from volatile stocks, instead invest in things like government debt.
- Investing in an index fund is ALWAYS a good idea. They have low fees, are simple to get started, and can be very profitable.
- Invest through your super.
For more free financial tips, sign up for my newsletter below.
This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.
MORE INSIGHTS FOR YOU
Who is Paul Atherton, That Wall Street Guy?
An ex-Wall Street advisor who worked with major players in the global financial industry for over 30 years, Paul’s mission is to help regular people reclaim their wealth and financial security.
AS SEEN IN THE MEDIA
More Helpful Tips
Subscribe for free market alerts
It’s not just an email subscription.
Get up-to-date tips and insights straight to your inbox.