May 21, 2018
The 8 Golden Rules of
Successful Investing - part 2
There are only
8 rules to successful investing according to Stuart Wemyss, my
guest on this week’s show.
Stuart, investing is as easy as winning a game of monopoly when you
know the rules.
Last week I
talked to Stuart about the first four rules of investing. This week
we’re going to continue the discussion by explaining the remaining
If you haven’t yet, make sure to listen to last
week’s episode, The 8 Golden Rules of Successful Investing -
The Golden Rules That We
Discussed Last Week:
- Rule #1 Play
the long game
- Rule #2 Know
how much income you need and by when.
- Rule #3 Spend
less than you earn and invest the difference regularly
- Rule #4 Grow
your asset base first and then tilt towards income
The Golden Rules That We
Discuss This Week:
Golden Rule #5 Set your
asset allocation to reduce risk and maximise
- Asset allocation is the
decision where to invest: property, shares, bonds, commercial
property, cash, etc.
- Asset allocation is an
investor’s most important decision as you cannot control markets
and returns – but can control where you invest.
- My advice is to adopt a
strategic long-term asset allocation and then make small tactical
tilts to accommodate asset class (under/over)
- Property is lumpy so: (1) look
at ex-property allocation on a year by year basis and (2)
project/aim to have a more balanced asset allocation by the time
you reach retirement
- Need to reduce volatility –
i.e. don’t lose money. If you lose 50%, you need to make 100%
- Volatility: Shares = 20%,
bonds 7-10%, property 10%.
- Invest in negatively
correlated assets e.g. shares and bonds. Property has very little
correlation with shares and is negatively correlated to
- Your allocation depends on
your starting point, risk profile, goals, time until retirement,
etc. – I back-test various allocations in the book.
- You need professional and
independent asset allocation advice.
Golden Rule #6 Invest in
the share market using low-cost passive
- Two types of management
styles: active and passive.
- Depending on the study,
between 70 and 96% of active fund managers fail to beat the market
over the medium to long run. The longer the period studies, the
worse the results. So, picking an active fund manager that beats
the market is like finding a needle in haystack, just invest in the
- Other benefits of a passive
approach include: lower fees, less tax (turnover), more
- Indexing works because
- Fees are low
- It relies on a rules-based
approach which is repeatable and testable; and
- You don’t have to put your
faith in one index methodology. Instead, use various, robust, and
proven index approaches (e.g. traditional market cap, fundamental
- You can access low-cost index
funds through Exchange Traded Funds and managed funds.
- Super: some
industry funds offer indexing, BUT it
is only traditional indexing – I believe you must diversify.
Optimising returns and fees typically will have a greater financial
impact than extra contributions – so optimise the way your super is
invested and the fee you pay first.
- I have included example
portfolios in the book i.e. which fund to invest in.
Golden Rule #7 Only
invest in ‘investment-grade’ property
- Definition of investment-grade
property: doubles in value every 7-12 years
- Three factors that all
investment-grade property must have: (1) Strong land value
component (2) scarcity in terms of land supply and property type
(3) proven performance.
- That is why off-the-plan
property doesn’t make a good investment – it fails all three
- I believe that you must pay
for asset selection advice from a reputable buyers’
- Quality trumps quantity – that is, in my experience, investors rarely
need more than 3 quality assets to be able to fund
- Constructing a property
portfolio: diversify geographically, diversify across various price
points, diversify your tenant profile, investing in a different
market to where your home is located.
- You must seek professional
loan structuring advice to ensure your tax, cash flow and risk are
- Must have a debt exit strategy
i.e. how are you going to reduced debt to an adequate level by the
time you reach retirement? Some of these are covered in the
Golden Rule #8 Protect
your investments from expected and unexpected
- Investing is
about getting the highest
return for the lowest risk.
To achieve this you must mitigate all risks.
- You must insure your most
valuable asset i.e. your ability to earn an income. Insurance is
simply an investment expense. If you are going to borrow to invest,
you must insurer yourself. Its early black and white i.e. all or no
cover – more correctly it’s about finding the right level of cover.
I talk about the how to get the best (cost-effective) cover in the
- Life and TPD insurance should
be held inside super (not in personal names).
- Interest rates – use fixed
loans and stagger maturity dates.
- Consider asset protection,
especially if you are self employed and in a higher risk
- Must have landlord insurance
if you invest in property.
- Estate planning – make sure
wills and power of attorneys are up to date and robust
- Consider relationship
breakdowns i.e. cohabitation agreements, financial
Selecting an advisor you
If you have
decided that you want to use property to build wealth, great. If
not, you need independent advice to help you work out which asset
classes to invest in:
- To avoid all the horror
stories, only seek advice from an independent advisor:
- Take no commissions, referral
fees or kickbacks
- Offer fixed fees
- Have nothing to sell
- Be privately owned with an
AFSL and with no links to banks or investment providers
- Demonstrate deep knowledge of
all asset classes (especially property and shares)
- Remember, you’re paying for
experience, not knowledge. Experience tells us how and when to
apply the knowledge.
- Getting advice is not opinion
shopping. Advice can be proven to be correct using simple math and
logic. If it doesn’t make sense to you then its likely you are
dealing with the wrong person.
Stuarts’s special offer:
Save 30% off the price of his book Investopoly
Go to http://investopoly.com.au/
and follow the links to buy. Use
the code “Yardney” to get a 30% discount.
Some of our favourite
quotes from the show:
“While you can get a lot of information you can
get off the internet, there’s an element that you just can’t get,
and that’s perspective, that’s experience, that’s on-the-ground
knowledge of what’s going on.” – Michael Yardney
“I’d rather own one Westfield shopping center
than 50 properties in regional Australia.” – Michael
“I’ve found most of our successful clients have
advisors in various areas of their life, and they see them as an
investment, not as an expense, and really having good advisors is
another risk mitigation strategy.” – Michael Yardney
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