The 8 Golden Rules of Successful Investing - part 2
There are only 8 rules to successful investing according to Stuart Wemyss, my guest on this week's show.
According to Stuart, investing is as easy as winning a game of monopoly when you know the rules.
Last week I talked to Stuart about the first four rules of investing. This week we're going to continue the discussion by explaining the remaining rules.
If you haven't yet, make sure to listen to last week's episode, The 8 Golden Rules of Successful Investing - part 1.
The Golden Rules That We Discussed Last Week:
- Rule #1 Play the long game
- Rule #2 Know how much income you need and by when.
- Rule #3 Spend less than you earn and invest the difference regularly
- Rule #4 Grow your asset base first and then tilt towards income
The Golden Rules That We Discuss This Week:
Golden Rule #5 Set your asset allocation to reduce risk and maximise returns
- Asset allocation is the decision where to invest: property, shares, bonds, commercial property, cash, etc.
- Asset allocation is an investor's most important decision as you cannot control markets and returns – but can control where you invest.
- My advice is to adopt a strategic long-term asset allocation and then make small tactical tilts to accommodate asset class (under/over) valuations.
- Property is lumpy so: (1) look at ex-property allocation on a year by year basis and (2) project/aim to have a more balanced asset allocation by the time you reach retirement
- Need to reduce volatility – i.e. don't lose money. If you lose 50%, you need to make 100% back.
- Volatility: Shares = 20%, bonds 7-10%, property 10%.
- Invest in negatively correlated assets e.g. shares and bonds. Property has very little correlation with shares and is negatively correlated to bonds.
- Your allocation depends on your starting point, risk profile, goals, time until retirement, etc. – I back-test various allocations in the book.
- You need professional and independent asset allocation advice.
Golden Rule #6 Invest in the share market using low-cost passive investments
- Two types of management styles: active and passive.
- Depending on the study, between 70 and 96% of active fund managers fail to beat the market over the medium to long run. The longer the period studies, the worse the results. So, picking an active fund manager that beats the market is like finding a needle in haystack, just invest in the haystack (index).
- Other benefits of a passive approach include: lower fees, less tax (turnover), more diversification.
- Indexing works because
- Fees are low
- It relies on a rules-based approach which is repeatable and testable; and
- You don't have to put your faith in one index methodology. Instead, use various, robust, and proven index approaches (e.g. traditional market cap, fundamental indexing, dimensional):
- You can access low-cost index funds through Exchange Traded Funds and managed funds.
- Super: some industry funds offer indexing, BUT it is only traditional indexing – I believe you must diversify. Optimising returns and fees typically will have a greater financial impact than extra contributions – so optimise the way your super is invested and the fee you pay first.
- I have included example portfolios in the book i.e. which fund to invest in.
Golden Rule #7 Only invest in 'investment-grade' property
- Definition of investment-grade property: doubles in value every 7-12 years
- Three factors that all investment-grade property must have: (1) Strong land value component (2) scarcity in terms of land supply and property type (3) proven performance.
- That is why off-the-plan property doesn't make a good investment – it fails all three criteria.
- I believe that you must pay for asset selection advice from a reputable buyers' agent.
- Quality trumps quantity – that is, in my experience, investors rarely need more than 3 quality assets to be able to fund retirement
- Constructing a property portfolio: diversify geographically, diversify across various price points, diversify your tenant profile, investing in a different market to where your home is located.
- You must seek professional loan structuring advice to ensure your tax, cash flow and risk are optimised.
- Must have a debt exit strategy i.e. how are you going to reduced debt to an adequate level by the time you reach retirement? Some of these are covered in the book.
Golden Rule #8 Protect your investments from expected and unexpected risks
- Investing is about getting the highest return for the lowest risk. To achieve this you must mitigate all risks.
- You must insure your most valuable asset i.e. your ability to earn an income. Insurance is simply an investment expense. If you are going to borrow to invest, you must insurer yourself. Its early black and white i.e. all or no cover – more correctly it's about finding the right level of cover. I talk about the how to get the best (cost-effective) cover in the book.
- Life and TPD insurance should be held inside super (not in personal names).
- Interest rates – use fixed loans and stagger maturity dates.
- Consider asset protection, especially if you are self employed and in a higher risk occupation.
- Must have landlord insurance if you invest in property.
- Estate planning – make sure wills and power of attorneys are up to date and robust enough.
- Consider relationship breakdowns i.e. cohabitation agreements, financial agreements
Selecting an advisor you can trust
If you have decided that you want to use property to build wealth, great. If not, you need independent advice to help you work out which asset classes to invest in:
- To avoid all the horror stories, only seek advice from an independent advisor:
- Take no commissions, referral fees or kickbacks
- Offer fixed fees
- Have nothing to sell you
- Be privately owned with an AFSL and with no links to banks or investment providers
- Demonstrate deep knowledge of all asset classes (especially property and shares)
- Remember, you're paying for experience, not knowledge. Experience tells us how and when to apply the knowledge.
- Getting advice is not opinion shopping. Advice can be proven to be correct using simple math and logic. If it doesn't make sense to you then its likely you are dealing with the wrong person.
Links and Resources:
Michael Yardney
Metropole
Stuarts's special offer: Save 30% off the price of his book Investopoly
Go to http://investopoly.com.au/ and follow the links to buy. Use the code "Yardney" to get a 30% discount.
Some of our favourite quotes from the show:
"While you can get a lot of information you can get off the internet, there's an element that you just can't get, and that's perspective, that's experience, that's on-the-ground knowledge of what's going on." – Michael Yardney
"I'd rather own one Westfield shopping center than 50 properties in regional Australia." – Michael Yardney
"I've found most of our successful clients have advisors in various areas of their life, and they see them as an investment, not as an expense, and really having good advisors is another risk mitigation strategy." – Michael Yardney
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