Throughout history, humanity has thrived due to a singular driving force which has fueled our success as a species. It has helped us to build communities, cities, improve technology and practically all advancements of mankind – we want more. More for ourselves, more for our children, and we want to leave behind a legacy and be remembered for the contributions we made during our lifetime.
Social order dictates that we work our 40 hours a week, relax on weekends, repeat for 50 years and hopefully we have saved enough during that time to not wind up in a shabby nursing home. But there are those of us that want more and constantly dream of escaping this grind. The fact that you are even reading this is proof – we want to position ourselves to no longer have to work: to let our money work for us, with our only job to worry about how to spend it.
If you’re still battling and working a 9-to-5 job, don’t lose hope, continue to work hard and advance your career, but never lose focus on one key fact: Making money is only half the battle, keeping it and nurturing the growth of your wealth is the second and equally vital component. As the saying goes, wealth begets wealth, and when considering the returns that can be made by smart investing there are some truly exciting ways to watch your money grow.
Inflation is your enemy
What happens if you don’t plan for your future? The sad fact is that most jobs don’t increase your wage as quickly as everything around you increases in price. For first home buyers this is a sad fact of reality – there never seems to be the right time to take the plunge and buy your first property.
You may have an elderly relative that reminisces about the times when going to the cinema only cost a sixpence. A recent trip to the movies set my wife and I back around $60 – not counting the cost of drinks and popcorn. Then there’s Gold Class. Forget about it.
So if you aren’t savvy and want to play it safe, then you may look at keeping your money in the bank and getting a low percentage interest on your savings. Bank interest looks nice on the surface but in the long term if your money isn’t increasing at a rate above inflation, you will become comparatively poorer over time.
Let’s say you are more of a risk taker and decide ‘hey I can afford to pay off a 2nd mortgage for a little bit extra in monthly repayments’ if you time it right you can earn yourself so much more than you’d ever get by saving up your monthly pay.
The Sydney property boom over the past 5 years has seen some properties roughly double in price, allowing shrewd investors to make a killing. Had they kept their money in the bank the returns would have been dismal in comparison.
The take home message here is that if you want more, you have to invest more.
When looking at investing, outside of the usual favorites of property and shares there are some often overlooked commodities that can at times be a worthwhile way to accrue wealth, such as: art, gold and silver, paintings, and wine. Forex can be an interesting one with quality returns if you time it right. So let’s look at the positives and negatives of investing in foreign currency exchanges.
Currencies fluctuate, and they do so based on a variety of factors, e.g. mining boom, tourism, strength of the economy, and general outlook for the years ahead. Investors often trade in currencies in order to generate a profit when they can correctly predict price movement.
Looking at the AUD vs USD currency, the following can be observed over the past 10 years:
The AUD bottomed out at 60.5c US in 2008. Within three years the AUD hit highs of $1.10 US, so in just a short period of time it had almost doubled in price. Something that property investors would rarely see in practically any market.
When looking at the AUD to SGD comparison we see a similar result:
In 2008, a low of 91.3c SG, and then within just a year it had bounced back to $1.30 SG. Approximately 40% growth in a single year. So what is the catch? Why doesn’t everyone invest in Forex?
Consider the reverse situation of the above examples – if investing in SGD in 2011 it would have been at a price of $1.30 SGD with the price looking to increase. This would have been a horrible situation because the Aussie dollar only increased slightly to 1.35 over the next year, and has steadily dropped below this value for more than 3 years straight, giving no opportunity to trade out at a profit.
So over the past 5 years it has dropped by roughly 30%. Consider the returns you would have gained on an inner city apartment! To compound your pain, during this time, unlike other investment opportunities, you do not receive dividends like you would with shares, and you do not receive rent like you would with an investment property.
When it comes to Forex, there is the potential for rapid profits that can be achieved with some good timing on your trades, but there is a lot of risk involved and no guarantee you will be able to cash out from your investment at a profit any time soon, if at all.
Margin trading takes this risk to another level, by only paying a fraction of your trade up front. For example, if you want to trade $100,000 AUD against SGD at the current price on a 0.5% margin ($500). If the Aussie dollar quickly increases, you can cash out a considerable sum. However, if it free-falls you are liable to pay much more than your initial investment amount. So if dealing in Forex, always do your homework, get advice from professionals, and don’t invest more than you can afford to.
Gold, Silver, Wine, Art…
Much like investing in foreign exchanges, these types of investments do not offer ongoing returns the way that shares and properties do.
Gold in particular has experienced some exciting increases in recent years. Consider the increase below, if buying gold in 2008, it could be purchased at around ~$900AUD/oz. Within less than a year, the price had almost doubled to ~$1,550 AUD/oz!
This is a huge ROI for such a short investment that cannot be matched by property. However, this is a best case scenario for a quick buy/sell turnaround to increase your cash flow. Nobody has a crystal ball that tells them when the exact right time is to buy and sell. For example, if you had bought gold in 1986, its value stayed relatively stagnant for almost 20 years before it’s recent boom.
Over the long term you should see increases, but the rate of increase is by no means guaranteed, so it can be a risky investment in the sense that you may have to wait a long time to reap any rewards, and if your situation dictates that you need to sell while the prices is low you could face a loss.
Investing in property is one of the most popular ways to make money. As a rule of thumb, property value doubles every 7 to 10 years. This is not guaranteed in all areas as some suburbs far exceed this rate, and some areas fall way short. However, long term investors should see a figure close to this in most scenarios.
Let’s look at this as an example for how this can benefit you.
Consider buying a $500,000 2-bedroom furnished apartment in the Brisbane CBD.
If the doubling every 7 years’ figure holds true:
- 2015: Purchase price of $500,000
- 2022: Property value is $1,000,000
- 2029: Property value is $2,000,000
- 2036: Property value is $4,000,000
- 2043: Property value is $8,000,000
When you buy the property, the rental returns on this should be close to ~$600 per week at the current market rate. It is important to note that this rent figure will also increase over time.
Assume you have bought the property with a 20% deposit, this means your loan amount is $400,000. At a 4.88% interest only loan over 30 years, fixed for the first 5 years, you would have monthly repayments of $1,627 per month.
If the rent increases by 5% per year, by the end of this 5-year period your weekly rent will be up to ~$730 per week, meanwhile your interest is fixed for the duration of that 5 years, so as your rent increases your profit goes up.
If you are on an interest only loan and never pay off a single cent of the bank loan, by the end of the 30-year period, you will still owe $400,000 but by this time you can still your property for $8million, and pay off the entire loan without making much of a dent into your sale price, pocketing a cool $7.6 million for your efforts. And let’s not forget that throughout the life of the loan, the rent will continue increasing. By the end of the 30-year cycle at a 5% increase per year, your rent would reach $2,470 per week. So if you are still paying $1,627 per month, you would be making a monthly profit of $9,076 (not counting tax, strata costs, rental manager fees etc.)
When mentioning shares, most people recoil in fear after hearing horror stories of people losing their savings on bad investments, or simply reacting to drops in prices and selling in case the price never recovers.
However, investing in shares can lead to high end returns with unparalleled gains if you can time it right with a stock due to take off. Consider Adacel Technologies Limited (ADA). They are a technology and systems integrator involved in aviation, speech recognition and work in defense simulation systems for government. At the beginning of 2015 the share price was $0.25 however it has increased to a high of $2.22 – almost 10x increase.
Blackmores started the year at $35.19 it has now increased to $187.54 per share – more than 5x its price in under 12 months!
When you invest in a company they will often pay you quarterly dividends. For example, Blackmores most recent dividend that they paid was $1.35 per share that you own. So if you had bought 1,000 shares at the beginning of the year, you would have paid $35,190, and those same shares would now be worth $187,540. On top of that you would have earned roughly $5,000 in dividends as well, taking you over the $150,000 profit mark for the year.
It is important to diversify so that you are covered in case of an unexpected loss. When buying shares, split your investment over a few companies, do your research and consider buying some low risk options from companies with long history of annual profits.
When investing in property, don’t put all your eggs in one basket, try not to buy multiple units in the same building or same area in case it doesn’t pan out as you’ve projected. If you look at more unconventional options, do so with the knowledge that you are taking on more risk.
Whichever type of investment is right for you, don’t rush in, do your research and look at every possible outcome. Test your budget and know your numbers. If interest rates climb unexpectedly can you maintain your home loan repayments. If you have an emergency come up, do you have enough remaining in liquid assets / cash that you will be able to resolve them without damaging your investments or losing money.