Last week this blog set out a simple path for wealth building over a working lifetime, from almost no assets as a young person to financial independence at retirement. The path requires some complex choices to be made.
For example, once a person has bought a home and seen their equity in it grow over time, they need to start new investments. With reliable income and some surplus cashflow, they will have multiple options to choose from.
A common choice is a residential investment property. Some people start buying shares and build a large portfolio over time. Others purchase managed funds, contribute periodically and build their values. All these investments can be purchased with borrowed money.
Superannuation is a very effective way to build wealth. It has unique restrictions, but also special tax advantages.
Lenders will lend to buy a residential investment property if a person has reliable, surplus cashflow and equity in their home. Most residential property will grow substantially in value long term and provide a moderate net rental income to help pay interest.
Growth is not regular however. There are surges, flat periods, and occasional small declines. Recently we have seen a big jump in values. With borrowing costs rising, further growth is unlikely near term. Fortunately, demand from city escapees means values in our area are unlikely to fall.
Shares have had a very variable year. After starting strongly, they have seen sharp falls due to rising interest rates, the Ukraine War and shortages. Losses have been interspersed with rebounds but values are still down, allowing cheaper buying.
The annual reporting period for most companies has just finished. Overall it has been better than analysts expected with many strong results. However companies were cautious about the future, saying rising interest rates are eating into consumer spending and making debt more costly.
Managed funds invest in shares, commercial property and infrastructure in Australia and overseas. They can provide strong growth but are affected by market movements. With professional management, and the ability to start small and add regular contributions, they are very convenient.
Superannuation invests in similar areas to managed funds, and like them, investors can choose their preferred options. Super has very beneficial tax concessions allowing faster wealth accumulation but the restrictions on access limit its uses.
So long as investments are long term, economies will perform and all options will do well. Buying appreciating assets is the key, with borrowings if debt isn’t too costly.