Cast your mind back to March 2009. If you remember it we’ll you’ll recall there were a lot of long faces on investors. And for good reason – Share Markets, Property Markets and Bond Markets had all ridden a depressing downward slide, for close to two years. The outlook was improving but nobody seemed to know if the light at the end of the tunnel was actually an oncoming train.
Since early 2009 investments have been producing strong returns with the median balanced fund in positive territory for nine straight years, meaning there’s a lot more happy faces, particularly for those with money in Superannuation.
However, this begs the questions, ‘When is it going to end?’ and, ‘When is the next crash going to happen?’. Investing is a lot like farming – you get some great years, some average years, and the odd drought along the way. Like droughts on the land a financial drought is only a matter of when not if. It might not occur in 2019, it might not occur until 2025 but rest assured, it will occur. Now (if not every year) it’s important to reflect on your investments and get your head in the right space for what’s coming.
Over the past 20 years I’ve had the opportunity to gain great insight into families finances and I’m regularly asked, ‘Is now a good time to invest and get out of cash or is now the right time to sell and get into cash?’ Each question, on it’s own, is exceptionally difficult to answer but if you ask one, then at some stage you’re going to ask the other, and getting both questions right becomes impossible.
Accepting that financial droughts happen, at CommonCents we know the wealthiest minds invest with a purpose, and not just for the sake of it. And the result of this is always a happier, healthier life with a lot less stress.
If you’re expecting great returns, consistent returns, never look at your money but you only have one money goal then you need to read on.
SPEND WITH PURPOSE
Every investment you make must have a purpose. In other words, if you have money in a bank account it needs to be for a reason that’s specific to you, not a general assumption, like, ‘it’s safe’.
At CommonCents we advise clients to have three key areas of spending purpose – now, shortly and later.
Now – Any spending you have upcoming in the next five years sits in this area. This includes items like, groceries, utilities, fuel, car maintenance and annual holidays.
Shortly – Spending destined for the next 10 years sits here, and are typically larger in price tag. This may include a new fridge/washing machine, car, overseas holidays and school fees.
Later – What comes later? Hopefully retirement, being debt free, or maybe that once-in-a-lifetime holiday or purchase of a business. Anything that requires 10 years, or more, of dedicated saving to achieve, sits here.
INVEST WITH PURPOSE
From spending purpose we can draw parallels with investment purpose and start to ‘quarantine’ the three spending purposes into three areas of investment risk. I like to call these time-based-risk-tanks.
Tank #1 – This is for your now money and the risk taken needs to be very low. This is where bank accounts and term deposits come into their own. Invest monies here for no longer than five years.
Tank #2 – Your shortly money lives here and risk can be a little higher, but not much. Some people might choose to use a term deposit for this Tank. But considering you’ll have a little more time (up to 10 years) and you should be adding to it regularly, Bonds/ Fixed interest investments could be more appropriate.
Tank #3 – Pop your later money here. Risk and return in this Tank needs to be higher as you won’t be using this capital for at least 10 years and you need better returns. I’m not talking, ‘Horse 7, Race 6’ here, I’m talking quality business’ listed in Australia and around the globe.
Market crashes are only devastating when you’re forced to sell your investments at the worst possible time. Using Tanks allows us to think of a farmer. Imagine a farmer who has plenty of water in reserve. Hopefully she’ll have enough time up her sleeve to wait for rain to make the grass grow, the cattle fat and decent buyers to come out of hiding. If you sell a farm in the middle of a drought, what price do you think you’ll get?
Keep enough in Tank #1 and #2 and you can stay happy and relaxed when the financial drought comes and Tank #3 drops a little lower.
When you’re next talking money with someone and they say they’re not sure if they have enough left in the tank, ask them which tank they’re talking about.