The definition of wealth is to be independently free from having to work to generate the income we need.  To achieve this, we need assets that produce our income.  These assets can be money in the bank earning interest, property producing rental income, shares paying dividends, intellectual property receiving royalties, or distributions from managed funds or unit trusts.  To build these assets we need a constructive plan that systematically ensures growth and expansion.

We kick-start our system by first determining the amount we can contribute to savings.  This should at least be 10% of our net income.  We then deposit this amount into a bank account separate to our normal cheque or savings account.  Ensure that this account is easy to deposit into and difficult to withdraw from.  To avoid the temptation of dipping into your funds, do not have an automatic teller card attached to it.

Then we need to gradually convert our savings into investments as soon as possible.  If we are using managed funds, we can convert our savings as soon as they reach $1,000.  Most managed funds have ‘savings plans’ that allow investors to contribute an initial outlay of $1,000 if they agree to deposit a minimum of $100 per month into that fund.  For example, if your annual net income is $40,000, your 10% savings will be $4,000 per year, or $330.00 per month.  With a little over $300 per month, you can choose to invest in 3 different managed funds. 

Developing an Investment Plan

 Low Risk Investments

Low risk investments are predominately cash, fixed interest and low-risk superannuation.  Cash represents money invested in “at-call” or term deposit bank accounts.  This has the lowest risk of all investments but has also the lowest return - in today’s market, approximately 3% to 6% per annum.  Fixed interest includes cash, cash management trusts and bonds.  They return approximately 5% to 10% per annum, sometimes as high as 15% if you invest in global bonds in good markets.

Superannuation returns and risk profiles vary from institution to institution, however the best and safest usually return on average 5% to 9% per annum.

Medium Risk Investments

Medium risk investments include property and non-speculative shares.  Diversified funds, which invest in a range of asset groups, are also considered to have medium risk profiles.  Average returns from these types of investments will range from 8% to 15% per annum.

I also like to include the broad spectrum of managed funds, to be discussed later, in the range of medium risk investments.  Some can return up to 25% depending on the fund type and managers.

High Risk Investments

High risk investments include all speculative shares, futures and any other type of investment that is purely speculative by nature.  Because with these types of investments we are betting on whether the price will go up, or sometimes down, this is classified largely as gambling.  Accordingly, the returns are unlimited but so is the ability to lose the total money invested.

Managed or Mutual Funds

Managed or Mutual Funds are a selection of investments that are professionally managed by a financial institution or organisation.  These institutions have a wide range of specialists, researchers and advisors who devote their time to ensuring that the fund invests in the best companies and assets. 

The advantages of investing in managed funds’ savings plans are they have a two-fold purpose.  First, you are entering into an investment as soon as you can save $1,000 and secondly, your regular monthly savings are kept safe within these funds from the temptation of drawing on your savings when you need a little extra cash.

Because managed funds cover the whole spectrum of investment risk profiles, you can easily cover your preferred investment portfolio, as described above, by investing in three to six different funds.

Putting Together Your Investment Program

After you have identified your investment type, you need to either find a good financial advisor or devote your time to researching investment options.  The do-it-yourself investor can safely invest in the many options available through managed funds providing he or she keeps up to date on the latest advice and research readily available on the Internet or magazines, books and media devoted to personal investment advice.

The next step is to start investing.  If your investment profile type is long-term investment, medium to high risk, then time is on your side.  All investments fluctuate with changes in economic markets.  Shares have traditionally outperformed other asset groups over time.  However, share markets can widely fluctuate in the short term, so any entry into the market should always be done with a long-term view of 10 years or more.  Even the best managed share funds can fall if the stock market crashes or enters a severe downward cycle.  As long as you ensure that you are with a reputable fund with good managers and are willing to ride the waves, your investment will do well in the long-term. If you are in the short-term, low risk category then your investments should be in the safer, more stable areas with lower returns.

When you start investing always start with the more secure, low risk categories first.  Determine how much should be invested in your superannuation and increase your contributions to that level as either ‘salary sacrifice’ or additional payments.  Next, invest in fixed interest and cash.  Managed funds also provide good options for investing in local or global bond funds.  Other alternatives include cash management trusts or term deposit accounts.

If your savings plan is only large enough to cover one or two managed funds at this stage, you may prefer to invest in one of the many diversified funds available.  These funds cover the broad range of asset mixes.  Choose one that fits your investment profile portfolio.

Your investment strategy should always identify the three ranges of investments: safe, medium and high risk.  Divide your investment choices into these three categories, building the safest investments first.