Investment strategies used to maximise investment return generally increase investment risk. Although you may understand the investment strategy you wish to utilise, it is also important to ensure you know when to apply the strategy and how. At Pinnacle Financial Planning, our Financial Advisers can assist you with this and ensure the investment strategy is right for you.
Re-investing distributions from your investment may assist you to achieve your goals sooner. Re-investing distributions or dividends earned from your managed fund or direct share portfolio allows you to compound the investment return (earn interest on interest).
Regular Savings Plan
Utilising excess cashflow to contribute regularly to an investment allows you to take advantage of "dollar cost averaging", a strategy that averages the cost of purchasing units or shares in an investment over time. It takes advantage of the only certainty of the markets, where prices will rise and fall.
By investing regularly, you buy more units when prices are low and fewer units when prices are high. Therefore, the average price you pay per share can be lower than the average market price. Additionally, this strategy provides a disciplined way to save money.
Gearing (Borrowing to invest)
Borrowing for Investment purposes, also known as leveraging or gearing, has a number of advantages and disadvantages. Gearing is where an investor borrows money to purchase an investment. The strategy aims to increase your return by using borrowed funds in addition to your own capital. However, losses can also be increased if the value of the investment falls.
Salary packaging, also known as "salary sacrificing" or "flexible remuneration planning", aims to enable an employee to receive a combination of income and benefits in a tax-effective manner through an agreement made by both the employer and employee. The benefits that can form a package as part of your salary are dependent upon your type of employment, and the company for which you work.
One type of salary packaging arrangement is to direct part of your salary to your superannuation fund, referred to as salary sacrifice. As this portion of cash is not received by you, it does not form part of your assessable tax income, however it is subject to tax within the superannuation environment, i.e. 15%. Salary sacrifice is one of the simplest and yet most tax-effective ways to build wealth for retirement.
Tax Effective Investments
Being able to minimise the tax you pay on your investments is all about good financial planning. If you're sick of seeing half the income from your investments disappear as tax there are strategies you can use to help you minimise the tax you pay without taking too much risk.
The impact that tax effective investment strategies have on your tax liability will differ for everyone, depending on your personal situations including your marginal tax rate or the investments you own. Therefore, it is important that you seek qualified financial advice prior to implementing any tax effective strategy.
Different tax effective investment strategies may include:
- Share Franking
- Bonds and Education Plans
- Splitting your income
- Borrowing to invest
- Agribusiness investing
- Debt Management
"Bad debt" such as home loans and credit cards are not tax deductible, therefore it is important to consider paying off "bad debt" (non-deductible debt) prior to investing available funds.
Some points to consider when looking at reducing and removing bad debt include:
- Paying off debt with the highest interest rate first
- Aim to make repayments above the minimum monthly requirement
- Change payment frequency from monthly to fortnightly or weekly
- Use a budget to help save and reduce "bad debt"
- Make it a priority to repay "bad debt" first
Assistance with Buying and Selling Shares
When you own shares you become a part owner of a company and therefore share in the success of the company. Returns to shareholders can be paid as dividends from profits or through capital growth in the share price. Generally, shares are considered to be medium to high risk investments as investors rely on the company to perform well and grow over time. They are long term investments in that the investor needs to be able to ride out any short term fluctuations in the share price.
Shares should only be purchased if they fit into an investment plan that suits your specific needs and circumstances. At Pinnacle Financial Planning, we can assist you to put together a share portfolio that meets your objectives and shows potential for both income and capital growth. We utilise a panel of sharebrokers to assist us with purchasing and selling shares and other securities on your behalf.
If you would like to find out more about these wealth creation strategies, contact us to make an appointment with one of our qualified Financial Planners.