The Impact of Money

In recent newsletters, we have been discussing the “outputs” that we are seeking from an Investment Strategy. Most importantly, we will be looking for ongoing capital growth of our investment asset, i.e. that the value of the asset grows over time, a yield, or ongoing income stream, from the asset, e.g. dividends from a share portfolio or rental income from a residential property, or some combination of the two.

In this newsletter, we begin the discussion of some of the key factors which will be “inputs” to an investment strategy. Investments don’t just happen; they require some input from the investor, and this can take a number of forms. The first input we will be looking at is money.

Let’s assume that we are in the fortunate position of having some spare cash and are considering what we will do with it. Of course we could spend it, but then it’s gone and we will probably have little to show for it in the long run. Or we could put it into a bank account – this is probably the simplest form of investing, and we would expect to be paid Interest by the bank in return for the use of the money. Another option would be to invest the money yourself. You could buy something (such as a share portfolio or a residential property) which you expect will increase in value over time and/or provide an income stream. Another common approach would be to give the money to someone else to invest on your behalf, such as a financial adviser, managed fund or superannuation fund.

How much money is needed?

Most investments are going to require an amount of money to get started and that amount of money will vary depending on the choice of investment. For example, some bank accounts have a minimum deposit amount; most managed funds will require a minimum initial investment, and of course if the selected asset is property, the starting amount of money required will be the price that you pay for the property. On the other hand, if you choose to put money into a superannuation fund, there are limits to the maximum amounts that can be contributed.

There may also be other money required at the time of starting up the investment. Managed funds and superannuation funds may charge an Entry Fee. If you are investing in a share portfolio, you will need to use a stockbroker to act on your behalf and they will charge a brokerage fee. If you are buying a property, you will be required to pay State Government Stamp Duty, a transfer fee, and you may also pay a conveyancer or solicitor to act on your behalf in the purchase. In some cases, these fees and costs may be taken out of your original investment amount, reducing the amount you have invested; in other cases the payments will be additional to the sum invested.

Some investments will then also require an ongoing contribution of money over the life of the investment. For example, a bank account may charge an account keeping fee each month. A financial adviser, managed fund or superannuation fund will typically charge an ongoing management fee based on a percentage of the amount of money invested. An investment property will require ongoing spending in the form of management fees, local government rates, land tax, insurances, maintenance, etc. Again, these amounts may be taken directly from your invested capital, reducing the amount invested, they may be taken from any yield you may be receiving from the investment, or you may be required to pay them as a separate expense.

And finally, there may be costs to close out the investment and get your invested funds back in the form of cash. Managed funds and superannuation funds may charge an Exit Fee. A share portfolio will need to be sold through a stockbroker, and they will again charge a brokerage fee. Selling a property will usually require engaging a Real Estate Agent to sell the property on your behalf, and again you may also pay a conveyancer or solicitor to act on your behalf in the sale. In most cases, any fees and charges will be taken out of the amount realised from the sale of the asset, reducing the amount you receive back in cash.

So comparing the cost of alternative investment strategies is not just about the upfront amount that you choose to invest – there are potentially a number of other costs that need to be taken into account to determine the true “whole of life” cost of an investment, and this can be an important factor in determining the choice of investments which are best suited to meeting a person’s investment objectives.

Empower Wealth’s Personal Wealth Management Program includes a sophisticated Wealth Projection Simulator which allows you to see the effect of investment strategy decisions by modelling the effect of these different costs, together with all the other factors which influence the long term financial outcome of an investment, to give you the numbers you need to make an informed decision about your financial future.

If you would be interested in seeing how these tools and techniques could be applied to your own personal financial situation, please come and see us for a free one hour consultation by registering at our website or just give us a call.