In a world of confusion and mixed messaging, the KISS principle of “keep it simple stupid” works more often than not.
But as the investment floggers have discovered, in the world of investment management and when there’s money to be made, you should never let KISS get in the way of a good sale.
It happens often enough.
You get an injection of funds, sometimes unexpectedly. Maybe an inheritance, the proceeds from the sale of an investment property you finally offloaded, or even money from the sale of a car or boat that’s no longer used.
It might be tens or hundreds of thousands of dollars, but a cash windfall can often trigger a visit to a financial “expert” to see where the money is best invested.
The cookie-cutter financial product flogger, disguised as a financial adviser, will simply whip it into an investment with one eye on the rich fees and the other on that pesky legal compliance paperwork.
Sadly, there’s scant regard for what’s actually best. And what’s actually best might be to simply stick the money in the bank.
Of course, everyone’s situation is different and there are many twists and differing scenarios to consider. But that shouldn’t detract us from applying some basic financial planning principles. These revolve around the time line of investing. Short-term means anything up to two years. Medium term, three to five, and beyond five years we regard as long term.
PRINCIPLE NO. 1
Do you have enough cash available in case there’s a problem?
Ideally, you should try to have the money to cover one to two months of expenses parked in your day-to-day transaction account. This is to ensure that if things go wrong you have enough money on hand to pay the power bill, put food on the table and run the car.
If you spend $4000 a month on expenses, then it’s not unreasonable to have somewhere between $5000 and $10,000 in your easy-to-access bank accounts.
PRINCIPLE NO. 2
Do you have a reserve to draw on?
This is for when the fridge blows up, the car breaks down or, more commonly these days, a kid that needs a hand because they’ve missed a mortgage payment. Having a rolling term deposit might produce miserable returns, but it gives you access to further cash if required.
Add to the list medical bills, house repair costs or an urgent trip to visit a sick relative in the east, that are very real expenses which many seniors will unexpectedly incur.
The actual amount will be a function of what you have to tap into, relative to what you may need and quite simply, your time left on earth.
PRINCIPLE NO. 3
Can you stomach the idea of losing money?
The term deposit approach means there is no possibility that your $50,000 ready-to-go stash could, virtually overnight, fall in value to $30,000. It’s not ridiculous to have all or most of the money in cash, term deposits or similarly safer investments if you are in your 80s and you prefer the simple, stress-free life.
After all, that big chunk or money might be needed to pay for home care or fund a place in aged care at a moment’s notice. Given the waiting list for home care packages, that’s not an unreasonable proposition.
There’s real risk sticking it into other investments such as a share portfolio or a managed fund.
Your friendly investment expert might very well show previous returns of 10 per cent over the past couple of years. We tend to focus on that and not the fact that to achieve that return, almost all of the money was invested in shares.
Shares which, within the past 18 months, have fallen by as much as 37 per cent over a few days.
That said, there are times when it is appropriate to put your money into a share portfolio or a managed fund and pursue growth.
If you have that ready-to-go cash on hand already, you have the resources to reasonably deal with most of what might happen, then you might start to consider the next generation or those who will ultimately inherit what’s left.
It might be a case of taking that longer-term view because while you might not have the time left to ride the bumps and troughs of investment markets, your kids and grandkids will.
And, of course, the ultimate solution might be to simply pass those surplus funds across now, when they might make better use of them than you. Paying off a mortgage while rates are at historic lows could be a gift that has extraordinarily long-lasting benefits.
And those benefits will go to your family, rather than someone that wants to flog you an investment.