InvestSMART

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.
By · 15 Oct 2018
By ·
15 Oct 2018
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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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Frequently Asked Questions about this Article…

Controlling your cash flow is crucial because you need to have money set aside to invest. Without managing your cash effectively, you won't have the funds necessary to start investing.

Shares and managed funds are easier to access with limited funds due to low entry costs. They offer a sense of ownership and can be a great starting point for new investors.

Technology has significantly reduced the cost of broking, allowing investors to buy shares and managed funds, including ETFs, with minimal entry costs and low annual fees.

The main drawback of managed funds is that all investment decisions are made for you, which might not appeal to those who prefer a hands-on approach to investing.

Diversification is important because it spreads risk across different asset types, reducing the impact of poor performance in any single investment. It helps protect your portfolio over the long term.

ETFs can provide international diversification by allowing investors to hold shares from various countries without needing to pick individual stocks, making global investing more accessible.

Keeping a portion of a portfolio in cash provides liquidity and stability, even though it may offer lower returns. It's a strategy to protect wealth, especially for those not seeking high returns.

Taking calculated risks is essential in long-term investment planning to ensure that your portfolio grows enough to support you over time, especially if you anticipate living many more years.