It is crucial to turn savings into investments. Cash and most other assets have an inverse risk relationship.

 

In The Short Term < 5 years

For time frames less then 5 years it is generally accepted that cash is extremely low risk compared to other investment types. Cash values should generally remain relatively constant in the short term, whilst in the short term property and shares can be quiet volatile and can easily show negative returns.

 

In The Long Term > 5 - 7 years

The risk of owning cash rises significantly over longer terms. In the long term cash biggest risk is you spending it, the second and equally large risk is inflation eating away at the cash's spending power. If you invest in cash for periods longer then 5 years you must try and ensure you can safely achieve returns 2-4% greater then inflation.

In the long term cash also carries a risk that the government or economy can render the currency worthless. See Zimbabwe as an example. The USA and other developed nations are not immune from this either. Do yourself a favor and do a bit of research on FIAT Currencies. Fiat currencies are money made from paper rather then gold or silver. You will be surprised how many Fiat Currencies have been rendered completely worthless, including the good old USA and not just once.

 

So in the long term it is best to have a mix of assets from various asset classes, such as shares, property resources cash and others. Please seek expert advice.

 

Property v Shares

Its not a case of which is best. They can both be good or bad investments depending on the share or property. Your aim should be to eventually own investments in both. Given most people own a family home which is a significant investment in property, it makes sense that most people would first invest in shares.

 

Share Selection

We are not stock brokers and can not recommend particular stocks but we can give you our stock selection process which has been incredibly successful. Even during the 2008 credit crisis, while we are slightly down on paper value our income from shares is exceeding our 2007 income. And since our reason for investing is for the income we regard this as a great success.

We purchase a book annually called Top Stocks 2009 ........ This book only lists the top stocks that meet a strict criteria of income and debt analysis. So for around $40 they take a lot of the leg work out for us.

We then subscribe to a Value Investing firm called Stockval that analyses all the companies using Buffets value investing models. This allows us to instantly see any of these figures accurately calculated and expert commentary on the profitability, outlook and management of the stock.

We then analyze the stock ourselves. We rank all the stock in order of ROE with highest being the best. If the stock appears in Top Stocks, has an ROE above 18% and an Net Debt / Equity below 30% but preferably around 0% we look further at the stock.

We require a minimum of 4 years data on each stock, but preferably 5 years.

ROE - Return on Equity - this is the most important aspect for selecting shares. The higher the better, but we never invest in anything with less then 18% ROE. ROE should be steady or increasing annually.

Net Debt To Equity - The amount of debt per share after cash on hand is taken into consideration, divided by the equity per share.

We look for dividend yields considerably above cash interest rates, preferably 3% or more.

There are a host of other factors but these are the basics.

Please do not make stock decisions based solely on this advice. It is crucial that novice investors seek advice from brokers.

 

Hot Tips!

Don't take hot tips when it comes to stock market investing. Invest based on value and return and invest for the long term. Buy and hold beats trading every time in the long term.

 

Investment Property Selection

The keys to great property selection is rental return and capital growth. Neither is acceptable on its own and usually the two cannot be found together. We operate on the philosophy that you will only ever get two of the three property ratios correct. Risk, return or growth. In other words you may find high return properties with low risk, but they will have low growth eg : university housing.

The key drivers for return and growth are proximity, scarcity, location, amenity and land content.

Proximity - closeness to employment, shopping and recreation. you want to be close, but not to close. Look for property with 800m of good transport and within 40 min of great employment opportunities. Properties with shopping, a variety of schools and recreation facilities with a 20 minute radius are best.

Scarcity - properties that are scarce and not easily duplicated are best. Eg water front homes or in lovely tree lined low crime suburbs. Look for features that make them rare. If buying units, look for the best aspect and floor in the best building in the best suburbs. That way when you go to sell your property is rare and buyers will pay a premium for it. Where as if you are one of 20 units for sale on the noisy side of a building they will have all the negotiating power.

Location Location Location - location is obviously very important as you cant move a property. When considering location it is scarcity, proximity and amenity that dictate a good location.

Amenity - is the absence of noise, smells, crime, traffic, social disturbance and the presence of good features such as footpaths, parks, pretty scenery, views and services.

Land Content - Land goes up in value while buildings go down in value as they get older. When buying property if you where presented with two similar properties side by side and one had significantly more land content, then if all other factors where equal the larger land content would be the better investment. Another example is that buying a unit in a 30 year old high rise complex with 300 units you own your unit, but you only own 1/300th of the land when the building is worthless or derelict. If you purchased in the 2 story building next door on the same sized parcel of land that only has 18 units. Then you would own 1/18th of the land in 20 years time or when a developer came along wanting to pay $5 million for the land.

This is by no means an exhaustive criteria and cannot be relied on as the only criteria for selection.

Gold Silver and Precious Resources

If you read our section on Fiat Currencies above or consider the situation in Zimbabwe which was recently a very prosperous nation, there is a strong argument for investors to own some silver and gold. The advantage of holding silver and gold is that when other asset prices are down, silver and gold are generally high. Additionally in the event of a FIAT currency collapse silver and gold will become the new currency or value of the new currency. The problem with holding too much silver and gold is that it costs a lot to hold and has no income so in most cases it is actually a liability.

We like to hold some as an insurance policy. Gold and silver needs to be stored offshore, as in the event your currency or government collapses they generally make private holdings of gold and silver illegal. See US history for two examples in the 1900's.

 

Remember

The primary purposes of investment are to store wealth, grow wealth, preserve wealth, and provide income. Never lose focus of these four objectives and always seek expert advice.

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Disclaimer - this information is general in nature and does not take into account your individual circumstance. You should always seek professional independent advice prior to acting on this information or making any decisions based on this information.