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Paul's Insights: Taking control of your cash flow

The problem with property is that it's hard to get into if you don't have much cash to invest.

I’m often asked how to get started with investing, however the real issue for me is whether you have control of your cash flow. You can’t invest if you don’t have money set aside to do it. So make control of your cash the first priority.

From here, people tend to caught up over whether to invest in shares or property. The reality is that both have been perfectly good performers over longer periods of time. The problem with property is that it’s hard to get into if you don’t have much cash to invest.

Shares and managed funds are a lot easier. What really excites me about technology is that the cost of broking is now extremely low. You can invest in shares and managed funds – including exchange traded funds (ETFs), for next to zero entry costs, and the fees on some ETFs are just a few hundredths of a percent annually. That makes shares and managed funds a great starting point especially if you have limited funds.

The drawback of managed funds is that all the decisions are made for you. By holding shares directly, you get a sense of ownership. And that can add an extra layer of interest to investing.

What about diversification? I have to admit that when I was younger I had no diversification at all.  The best investment I ever made was backing myself when I started ipac together with some very good friends. I tipped every nickel I had into the business so my risk was highly concentrated.

These days I’m in my 60s and my portfolio is far more diversified. I hold Australian and overseas shares though I use ETFs especially for international shares. I can’t pick shares in countries all over the globe, so I let the fund manager do that for me – and that’s something all of us can do for next to nothing these days.

I have a reasonable chunk of my portfolio in cash. I know it will be the worst performing part of my portfolio given today’s low interest rates. But like a lot of baby boomers I’m no longer chasing high returns. I’ve worked darn hard to get what I have and now I’m trying to protect it.

The thing is, I could live another 20 or 30 years, and if I held all my assets in cash I’d be sure to end up broke. So in a sense I still need to take risks if I’m going to live a long life.  By spreading my money across shares, managed funds – and property because I’m a home owner, I get diversification, and also a reasonable cash flow. Taking care of that part of my wealth is just as important for me now, as it is if you’re starting out investing for the first time.

Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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