Creating Wealth takes discipline and time.
There are some key elements to understanding wealth creation.
1. Funnel surplus income into income producing investments.
Do not rely on capital growth only, particularly in today’s environment.
2. Understand the different core “Asset Classes” that give you income investment returns.
These can be summarised into 3 main classes:
Defensive: - Cash, Fixed Interest and Credit Lending. … (Broadly asset class 1)
Growth:- Property (residential, offices, shops, industrial locations) ..( Asset class 2)
Growth:- Shares in companies.
(usually publicly listed, in Australia or Overseas) .. (Class 3)
Essentially, these are the basics of all investment choices and wealth creation.
Other investments that are sometimes classified as investments can be argued to
be otherwise because there is no income generated. Some are purely speculative,
such as Gold or other precious metals. These may have a role to play but generally
are either too volitile or fail to generate income.
More ”exotic” high return choices such as options, warrants, CFDs (contracts for difference) are higher risk and have greater risk of total loss with further debt incurred. These are not recommended for mainstream investors.
3. Understand the tax implications and likley future liabilities of your investment
choices. How you invest your money will affect your tax liability.
Your options are generally to invest either as an individual, a company or in a trust.
Each has it’s own advantages and also drawbacks – depending on your preferred
outcome. (Superannuation is simply a trust with it’s own unique low tax rate.)
4. Understand the advantages of diversification of your investments, which will reflect a
smoother outcome of returns and less volitility of results.
* * * * * * *
Property: Real Estate
This is a widely popular asset class because of 3 main reasons:
1. People feel comfortable about buying and maintaning property.
2. Banks will lend up to 80% – 90% of the value, with supporting cash flow.
3. Many people have some handyman -or- trades background and can partially
or fully DIY the repairs or renovations.
However, it is “lumpy” - you cannot sell half a house.
The actual returns after the interest and either mainatinance cost or hours
spent working – can be less than hoped for.
Capital growth can be modest or good, depending on the individual property.
Proper research of the area and the various options within the area, as well as any work you plan to do can improve the result. You make half your profit with a “good buy”.
People are currently less keen on shares since the GFC.
BUT – many shares offer solid income / dividend return of 4% – 9%
You can part sell a holding of shares and reduce your exposure – and buy
elsewhere. This flexibility partially explains the volitility that makes some
Overall shares tend to have higher capital growth and as an asset class are
regarded as offering higher returns. They are more likley to reflect GDP growth.
Additionally choosing good shares requires guidance and skill or using managed funds.
Many people find it more time consuming than they prefer to allocate, hence using a good advisor will enable you to avoid the shares or funds that have hollow performance AND more importantly allocate your funds between the different choices in the most appropriate manner.
Diversification with the allocation will generate a result with lower downside risk than a poor allocation that is too heavily allocated to the most “attractive” option – that may also be the most fragile in actual results. Avoiding the glamourous duds (shares or funds)will improve your results.