Introduction: In last week's article on the predicaments facing financial advice, Rob made this comment:
"As someone who has seen the very best and the very worst of financial advice, I just shake my head at the complexity and the BS. Is total paranoia with protecting backsides and protecting consumers where, in reality, it does neither, so it is very frustrating! When complexity fails to improve outcomes, it is fatally flawed. I now have two >18 grandkids and set myself a challenge to give them an introduction on one page! Simplicity is always harder than volume, but if we can educate young people in the basics, they have half a chance to ask the right questions and look after their own futures."
We received many requests to see Rob's one-pager, so we asked him for a copy. Turns out he is Rob Garnsworthy, former Managing Director of Norwich Union Australia.
Meeting a difficult challenge (and readers are welcome to send in their own ideas), here is the one-pager.
What are asset classes?
Essentially the broad name given to things you can ‘invest in’ – property; shares, which give you a fractional ownership of a company; bonds which are effectively ‘loans’ to companies or governments; then a whole range of things like gold, bitcoin [dumb], infrastructure, art, classic cars [!] and the list goes on.
‘Growth assets’ vs ‘safe assets’
In simple terms, property and shares are regarded as ‘growth’ assets – they ‘should’ grow faster than inflation – some do, some don’t. Over time, they have had very similar rates of growth BUT they can be volatile.
Bonds on the other hand have historically been regarded as ‘safe’ assets – returns will generally be lower but so will volatility. At times like this however, with all the geopolitical noise, Covid, Ukraine, China, nothing is particularly safe.
Know what it is
If you do not understand something, do not invest in it.
Time is your friend
At your age, you have time on your side. You can weather the ups and downs, you can stay invested through the down times, indeed that is always the best time to invest, and you can allow the ‘magic’ of compound interest to work for you. Take a long-term view with a well-constructed portfolio and you will be ok – 7-10% over 50 years is powerful.
Inflation is your enemy
Inflation ‘eats’ cash and spending power. It has been quiet for decades but now it's re-emerging. A cup of coffee that now costs you $4.50 will cost you $12 in 50 years if inflation rises at 2% per annum so the challenge is to have investments that increase faster than inflation – inflation + 4-5% is a good target.
Financial independence
Trust any government at your peril. There are two simple things you should aim for – to own your own home [lifestyle] and to be financially ‘independent’ [investment] in retirement. Tick both of those boxes and you will be ok.
Achieving the right balance
Rough guide – if your ‘lifestyle assets’ are approximately equal to your ‘investment assets’ at the point of retirement, that is not a bad balance. You cannot ‘eat’ your home. If you have investments around 20 times your cost of living, that is also not a bad target.
Superannuation
Super is not an ‘investment’ per se. It is a tax-advantaged structure that ‘holds’ investments. The trade-off is that you cannot access it until you are in your 60s. If you live with it day to day, you can manage it yourself. If not, a low cost professional manager is a better option.
Start your journey early
What we are doing here is but the start of a journey. By starting early and learning early, by going through cycles of euphoria and fear, you will learn. The challenge? To take responsibility for a future which is yours and yours alone.
Rob Garnsworthy is a retired former Managing Director of Norwich Union Australia.