For those of you who have made the decision to stop living from pay cheque to pay cheque, or are facing a less than stellar Superannuation fund payout in years to come and are considering getting into investment, a word of warning. While it’s great that you want to take control of your future (well as much as we can control), if you haven’t sat down and defined your investment strategy you may end up just throwing your hard earned cash away.
So what is an investment strategy and why do you need one? Well settle back and I’ll tell you our story of investment, what I found when investigating different options for investment and how we developed our investment strategy. Perhaps you might find inspiration to start your journey.
Note: I am not a financial advisor and do not purport to be one, my position may be very different to yours so any strategy should be discussed with your accountant and other finance professionals.
How it all started
Back in 1997 (oh my goodness that was 20 years ago – where did the time go) I was loving the opportunity to be a stay-at-home-mum. It was great to spend time with my girls in their early years however, it was not all sunshine and roses; we were living from pay cheque to pay cheque. Around this time I decided that I needed to look at an alternative way of making some money, or at least be able to come up with a strategy for saving some money, funds to cover future expenses and for our retirement. As this was pre-Google, my go-to source for information was the local library. I read every book in the business and investment section.
‘How to start a business’, nope sounds like too much work,
‘Investing in the Stock Market’, hmm maybe, but all those numbers and the need to read up on what was happening in the world will bore me to tears,
‘Building Wealth through Investment Property’ now that sounds interesting.
Yes, I had stumbled on Jan Sommers’ book written in the early 1990’s and her easy-to-read writing style grabbed my attention (note, this title is now out of print). Here was something that I could do. This information set the scene for our property investment strategy that developed over the following couple of years. Now those other books that I read, the ones on business and the Stock Market didn’t go to waste, after all I have been running my own small business since 2002 and have also invested in Shares; the key thing here is that my early research led to us developing an investment strategy.
An investment strategy is something that needs to be considered before you start down any investment pathway. Yes, we’ve all heard of those who haven’t done any specific planning and landed on their feet however, that is probably due to accidently stumbling across an investment strategy that met their need. Perhaps they purchased a home to live in and had to move for work. They rented out the property because they intended on returning to live there or because they couldn’t sell at the time, and thus became accidental landlords. Maybe this worked out well, so they rented out their next home and so on. Other people may have ended up with Shares in a company because the business was being floated on the stock exchange; not knowing what to do with the Shares they just hung on to them until they were worth a lot more. But for those of us who don’t have the ‘golden touch’, we should probably think a bit more about what strategy we are going to take.
Firstly what is an investment strategy?
According to Wikipedia, an investment strategy is:
‘…a set of rules, behaviours or procedures, designed to guide an investor’s selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics and strategies appropriate.’
I like this definition. It reminds me that I should have some rules that guide my investment decisions. These keep me on track and hopefully help me to avoid making poor investment decisions.
This definition also talks about behaviours. Remember I said that I didn’t want to initially invest in shares because I would have to read up on what was happening in the world? Well, the continual reading of newspapers and monitoring of world and local events would have been a behaviour I would have needed to engage in if I wanted to be successful in the Share Market. Still sounds like too much work for me – that’s why we ended up purchasing shares through Managed Funds, less work, but also a corresponding lower reward.
The definition also recognises that profit objectives and skills influence someone on deciding on a particular strategy. What this means is that if you are willing to accept a lower profit, you may decide, as we did, to choose Managed Funds over direct share purchases. Conversely, if you want a higher return you’ll generally need to choose a higher risk strategy. Additionally, the skills you have developed through life experience, or your work, are also likely to influence your investment strategy. If you are in the building trade you might decide that your skills and contacts are a better fit to take the path of renovation or development.
I’d also add one more characteristic that influences your ultimate investment strategy and that is ‘risk profile’. For example, someone who can’t or won’t accept a high risk is seen as being ‘risk adverse’ or conservative, note this is not a negative – it’s just a trait. This person may be better suited to investing in bricks and mortar where the chance of losing everything is a lot lower than perhaps Shares, which tend to fluctuate more. Even for those who are willing and able to accept a higher risk, as we age or take on dependents our risk profile often moves from risk embracing to risk adverse.
So what’s your strategy going to be?
I read somewhere that there are only three key investment strategies Cash, Property and Shares. I disagree with that as I think developing a profitable business is also a strategy for investment. But let’s look at how we have used these different strategies and see if any of them resonate with you.
Investing your cash is probably not going to give you a great return. Cash in the bank is invested by the lending institution to other investors in the form of mortgages to property and as business loans to companies. The bank will pay you interest for the privilege of using your money.
I am old enough to remember when we were receiving interest rates on savings of over 12%, thankfully we didn’t have a mortgage at that time as they were pretty horrendous. Even better for us at the time was the return on savings we had in a term deposit. Unfortunately, current interest rates are very low so the return on your investment is minimal. Still, money in the bank can be a great safety net and a wonderful sleep-at-night factor. I’d like more than I have at the moment – sigh.
Our main direct experience of the Share Market is of purchasing a few Telstra Shares when the company was floated on the stock exchange; the benefit of working for the corporation at the time. Beyond this we did purchase some short-lived shares in a company that built a cross-river tunnel in Brisbane, unfortunately, they went bust very quickly – that truly was a gamble and it obviously didn’t pay off.
Our other major experience with the Share Market was the purchase of some Managed Funds. We started with an initial $2000 deposit and added another $200 every month for a number of years; this was when both of us were working. The investment was set up primarily as a safety net in case anything went wrong with the properties or to cover key expenses. It was just as well we had this to fall back on as the Global Financial Crisis (GFC) hit us around the same time our kids suddenly became more expensive; forget the cost of buying baby gear, late teen years are definitely the winning years for sending parents broke. The managed funds allowed us to weather the GFC without having to sell any of our properties during the downturn, I used the last of this fund to purchase the services of a business mentor for a year; I’ll talk about that in a minute. Needless to say I think that having some sort of backup finance like this is a good idea, at least it was for us.
As I noted earlier, property investment was our primary investment strategy. However, as they say, the devil is in the detail.
Our initial investment strategy was to purchase and hold, low-maintenance brick, three bedroom, one bathroom properties. We managed to purchase three of these by 2004 along with our own home. All was going well until we found there were other property investment strategies and, unfortunately, we became a little like that kid in a candy store, wanting to try a bit of everything. We deviated from our initial investment strategy, for no other reason that the other stuff looked like it was more fun – if you are wondering how this turned out, let’s just say we’re thinking of returning to the original plan. On the up side though we did learn a lot about renovating and what tenants want, and not all of our choices have been bad.
You may want to consider some of these strategies for yourself, as they may be a better fit for the skills and the objectives you have.
- Cosmetic renovation – think paint, carpet and gardens (I actually love this one, it appeals to my creative side, this is great for just increasing the rental returns of a house and combining with a long-term buy and hold strategy as well as a buy and sell or flipping strategy)
- Structural renovation –removing or adding walls (Great for builders and those with a solid handyman background or for those with the time and skills to project manage)
- Flipping – buying and selling in short period of time, is often combined with a renovation (Have never done this myself but know a number of people who have done so successfully, I just can never find the right place, at the right price)
- Subdivision – in its simplest form taking one lot and dividing into two. (yep, been there done that, probably won’t do again. We actually did our research on this and purchased the right property, it didn’t hurt that the prices in the suburb rose as well. It’s a lot of work though so you want the rewards to be commensurate)
- Development – again in its simplest form it could be purchasing a block of land and building a house or it could be using that spare block you created in the subdivision. (I’ve found that purchasing a block of land and using a standard builders design can be a very cost-effective way of creating equity – it’s getting the block of land in the right place that’s most important)
- Strata title – this is where you purchase a block of units that are all on the one title and create individual titles for each unit. (while I have never done it myself, but I do know of some investors who have been successful using this strategy)
Of course, there are a number of other property investment strategies including buying commercial properties and smaller niche strategies such as setting up a house for student accommodation (did that one and there were pros and cons). The main thing to remember when developing your own property investment strategy is that it has to suit your risk profile, skills and knowledge and finances.
Remember way back at the start when I spoke about my library visits and how I read up on starting and running a business? Well, something must have stuck, because 5 years later I set up my own consultancy business, and it’s still going.
In 2012 I realised that after 10 years of work I needed to get big or get out. Sure the business was bringing in an income, but I had to work hard to bring that work in, and some years the income was woeful. I invested in a business mentor that year and the investment saw a ten-fold return within twelve months. Yes, it was still hard work but I learnt to work smarter not harder.
A business that is set up correctly becomes a cash machine, and as my mentor reminded me throughout, cash is king. Additionally, if you don’t have good cash flow you can’t hold onto your other investments. A business that is set up correctly can also be on-sold in the future if you no longer wish to work it. Alternatively, it can continue to pay you a dividend while others run it for you.
And don’t forget the possibility of business renovation. Similar to finding a tired house with good structure, a good business that has been let run down for some reason can benefit from an overhaul, and once demonstrating good returns can be on-sold to a new owner for a profit.
Ok, so that’s my take on investment strategies. I know there is a myriad of variations to these but perhaps they will encourage you to look at developing your own strategy.
So what about you, are you thinking about investing? What strategy would you use?