Nathan Bell has some tips to help build a strong financial fortress.
The problem with recent market rises is that it encourages us to forget the lessons of the global financial crisis.
Many Australians are delaying their retirement due to years of lousy sharemarket returns, notwithstanding recent good returns.
Though most will blame someone else for their predicament, in the end the responsibility rests with us as investors.
If you want to turn your portfolio into a financial fortress capable of withstanding attacks from inflation, taxation and the threat of recession, you're the one that needs to do something about it.
Here are seven ways to help you achieve financial success:
1 Never go back to square one
Losing most of your assets through one bad decision or plain bad luck means starting again, and settling for less. Whether you've saved $5000 for your first portfolio or have millions in assets, don't ever go back to square one. Make sure you always live to fight another day by preserving your capital by not exposing it to excessive risk.
2 Be realistic
Annual returns leading up to the GFC set unrealistic expectations. You cannot compound your asset base at anything like 20 per cent a year until your last breath.
The sharemarket returns nothing like that over the long run. In fact, over the past 10 years, returns have been closer to 10 per cent. If you want to increase your asset base, increase your savings and reinvest your returns with realistic expectations.
3 Avoid what you don't understand
It's tempting to invest in the "next big thing" that will shower untold riches on those that "get in now". The returns rarely match the hype (see Rule #1). Never invest in anything you don't understand. That means having a thorough understanding of the factors that will drive an investment's failure or success. Have the discipline to say, "I don't understand this", and leave it alone.
4 Buy quality
Buying what we think will go up next week is a big mistake. A better use of time and money is to buy what you're confident will go up over the next decade. Most of your portfolio should be invested in high-quality companies with top-notch management teams. Right now, some of Australia's best blue-chip businesses are attractively priced. Aim to hold quality stocks like this for the long run. Not only will you achieve good rates of return, there are significant taxation and brokerage savings, too.
5 Reinvest dividends
You don't have to opt in to dividend reinvestment plans, although that can be useful when the company's shares are cheap. Rather, view dividends as a boost to your regular savings, to be invested over time and not frittered away.
6 Avoid debt
Be careful with debt, especially products such as margin loans. As a rule, non-tax-deductible debt is unlikely to fortify your financial fortress, property bubbles aside. Steer clear of personal loans, car loans and big credit-card balances. Also remember that a half-extinguished mortgage isn't a "well of untapped equity"; it's a liability that should be paid off, so the deeds to the castle end up in your hands, not the bank's.
Pay extreme caution to tax-deductible debt. During the GFC men cried when told of the margin calls they faced. Building a financial fortress is all about having the strength to survive tough times. Debt hurts most when you can least afford it.
7 Have fun, sleep well
All financial decisions should clear one important hurdle: ask yourself, "Will this action affect the soundness of my sleep?"
Stocks that keep you up at night aren't likely to be big winners anyway. Financial independence brings peace of mind. And that will add to the soundness of your slumber and the quality of your life. So keep it simple, follow the basics, don't get greedy and sleep well.
This article contains general investment advice only (under AFSL 282288). Nathan Bell is the research director at Intelligent Investor Share Advisor, shares.intelligentinvestor.com.au.