How much do I need to start investing?

When you invest over a period of time, compound interest is your best friend. In effect, it means you are earning interest not just on your own capital, but also on the interest you’ve already earned. Over the long term, this might be phrased as “interest on interest on interest on interest on interest …” or more simply, “free money”! So how do you get this free money? This is how… A simple start Imagine you place $100 in an investment that earns 10% pa. At the end of one year, you’ve earned $10. Then you spend all the interest you receive. At the end of each year, your investment amount is back to $100. That’s simple interest. At the end of 10 years, you will still have your $100, and you will have received a total of $100 in interest. I = P(1+r)n-P Don’t worry, we’ll do the maths for you. It calculates your net profit when you earn interest on the interest. That’s what compounding is all about. Going back to our first example – if you re-invest the interest on your original $100, at the end of the first year you will have $110. Leaving it invested at 10% pa, you will earn interest of $11 in the second year, bringing the total in the account to $121. If you keep going for 10 years, your investment will grow to $270.70 – that’s your original $100 plus $170.70 in interest. Time is money – literally This example may not seem so impressive, but the power of compound interest really shines over the long term. Looking at our simple situation and taking the interest out each year for 30 years, you will earn a total of $300 in interest. But relying only on the compounding of the interest (ie. no other deposits are made), the total interest earned over the same time would be $1,883.74. A child born today could easily live to 100. Simple interest on a $100 investment would amount to $1,000 over their lifetime. Left to compound untouched at 10%, that same investment would grow to $2,113,241! Even on such a small initial investment, that’s an incredible difference! The other critical factor is the actual rate of earnings. If the earnings rate dropped just 1% to 9% pa, a one-hundred-year investment would grow to only $783,548 A couple of drags Don’t forget to take into account tax and inflation. They act as drags on investment performance. Let’s assume investment earnings remain at 10% pa and are fully taxable. What will your $100 grow to over 30 years at different tax rates? As for inflation, although we are currently experiencing very low inflation, nobody knows how long this will last. If it reaches the Reserve Bank’s target of 3%pa, you will need $2.43 in 30 years’ time to buy something that costs $1.00 today. There are many ways of minimising the effects of tax and inflation. Picking the right tax environment is clearly important. Capital gains are only taxed when an investment is sold, so growth assets have an advantage over those that only produce income. They also cope better with inflation. Investment risk Always remember, seeking higher returns generally involves taking higher risks but some of those risks can be managed with an effective and professionally constructed investment strategy. If you want to take advantage of “the most powerful force in the universe” contact us for a chat.   This is general information only  

Many people treat their home loan as a set-and-forget, riding out whatever the original loan terms and prevailing interest rates dish up. They may be doing themselves a disservice, as there are several ways in which borrowers can benefit from refinancing their mortgage. 1. Find a lower interest rate.Whether interest rates are rising or falling, in a competitive mortgage market you may be able to refinance your mortgage at a lower interest rate. The benefits are that you can then… 2. Reduce your home loan repayments. For a given loan term the lower the interest rate the lower your repayments. This then frees up some of your income for other purpose. Or you can… 3. Shorten the term of your loan.If you maintain your current repayments with a lower interest rate loan, you’ll pay it off sooner and save heaps on interest. 4. Switch from a fixed to a variable rate mortgage (or vice versa).A fixed rate home loan can help you lock in an interest rate for several years into the future. This can provide some protection against rising interest rates. Conversely, when interest rates are falling, a variable rate loan is the better way to go. Be aware, however, that even the experts often get it wrong when it comes to predicting the direction of future interest rates. 5. Consolidate debt or access equity.If your home has increased in value then refinancing may allow you to access some of the greater equity you have in your home. This may allow you to pay off higher interest debt, such as credit cards, take a holiday, or pay for renovations. Take careWhile refinancing a home loan can be a winning strategy that’s not automatically the case. There will likely be costs involved in both paying off the existing loan and in establishing the new loan. If the difference in interest rates between the old and new loans is small, it may be hard to gain a benefit. And take care when refinancing for debt consolidation or to free up equity. If you promptly max-out the credit card you’ve just paid off, you could be digging a deeper debt hole for yourself. To find out what would work best in your circumstances, please contact us today.   This is general information only  

Most people view share market downturns as unequivocally bad events. Suddenly, hard earned savings aren’t worth as much as they were yesterday. It seems as if our money is evaporating, and in the heat of the moment selling up can look like the best course of action. The alternative view But on the opposite side of each share sale is a buyer who thinks that they are getting a bargain. Instead of getting 10 shares to the dollar yesterday, they might pick up 12 or 15 to the dollar today. When the market recovers, the bargain hunters can book a tidy profit. So why do share markets experience downturns, and what are the upsides? A range of natural and manmade events can trigger market selloffs: Terrorist attacks Infectious disease outbreaks such as SARS and COVID-19 Wars, the possibility of war, and geopolitical issues such as threats to oil supplies Economic upheavals, the bursting of speculative investment bubbles, and market ‘corrections’ In short, anything that is likely to reduce the ability of a broad range of companies to make money is likely to trigger a market sell off. The common thread that runs through the causes of downturns is uncertainty. In the immediate aftermath of the 9/11 attacks nobody knew what the size of the threat was, and markets dropped. As the fear of further attacks receded, markets soon recovered. However, the initial drop in market value occurred quite rapidly. By the time many investors got out of the market the damage was already done. Paper losses were converted to real losses, and spooked investors were no longer in a position to benefit from the upswing. After the initial sell off it took the ASX200 Accumulation Index just 36 days to completely recover from 9/11. Other downturns and recoveries take longer. The Global Financial Crisis began in October 2007, and it wasn’t until nearly six years later that the ASX200 Accumulation Index recovered its lost ground. This caused real pain to investors who bought into the market at its pre-crash peak, but for anyone with cash to invest after the fall, this prolonged recovery represented years of bargain hunting opportunities. If? Or when? Of course, much hinges on whether or not markets recover. While history isn’t always a reliable guide to the future it does reveal that, given time, major share market indices in stable countries usually do recover. It’s also important to remember that shares generally produce both capital returns and dividend income. Reinvesting dividends back into a recovering market can be an effective way of boosting returns. Seek advice Of course, it’s only natural for investors to be concerned about market downturns, but it’s crucial not to panic and sell at the worst possible time. The fact is that downturns are a regular feature of share markets. However, they are unpredictable, so it’s a good idea to keep some cash in reserve, to be able to make the most of the opportunities that arise whenever the share market does go on sale. For advice on how to avoid the pitfalls and reap the benefits offered by market selloffs, speak to us today.   This is general information only