Q. I am seeking some broad financial direction for my wife (28) and I (30).
Both of us work full time but we may be reduced to one income for a period in the near future if my wife falls pregnant. I currently earn $104,000, and receive 15.4% super in addition to this.
My wife earns $90,000 and is salary sacrificing some of her income so that she contributes a total of 15% of her pre-tax income to super. My super balance is $65,000 and my wife’s balance is $45,000.
We have a house worth about $650,000 on which we owe $470,000. We have $210,000 in savings sitting in an offset account attached to the mortgage.
We have no other debts beside university HELP debts, which we are automatically paying off each year.
I also have a small share portfolio with 12 (mostly) blue-chip stocks such as banks and miners currently worth $30,000.
After expenses, we save about $5000 a month.
We want to set ourselves up and make sure our money is working as hard as it can for us without taking on too much risk. What could we do to improve the return on some of our savings beyond the 3.78%pa (albeit tax and risk-free) we are getting from the offset?
We are considering an investment property (a house in a capital city) with a view to renting it out in the short/medium term and building our dream home there down the track.
But we are worried that residential property won’t deliver competitive returns over the next decade or so, plus we are limited in what we can afford.
Alternatively, we are wondering whether to just buy some more shares, possibly LICs/ETFs for a long-term hold strategy.
But we are worried that now is a bad time as the sharemarket seems to be peaking and a correction may be likely soon.
If we go down the sharemarket route, should we just dive in now and trust that “time in the market” will do its thing? Grateful for your advice on shares or property. – Matt
A. Great to hear from young people like you, Matt.
About the only truths in investment are that risk equals return, time in the market is critical when it comes to growth assets and, of course, compound returns are powerful. Your question captures aspects of these three truths.
First, with decades of investing in front of you, the key issue is that you are building super and saving on a regular basis.
Property and sharemarket cycles are not particularly important to you. Sure, it is nice to buy when assets are cheap but we humans rarely do that.
I have no idea when the sharemarket will fall. I know it will but for all I know it may go up 50% first.
So I just tend to buy shares on a regular basis – good old dollar cost averaging. A super fund is great for this. I buy less when they are expensive, more when they are cheap.
Property is a bit more predictable. After a long boom and decades of falling interest rates, the tide had to turn. Rates are moving up and the banks are making loans much harder to get. So the market is falling and I think it will for a while.
But look out to the future and our population will grow to some 35 million in 30 years or so. Sydney and Melbourne will each have over 8 million people. So we can expect rising prices in areas with population growth.
This is personal but at your age and in your shoes, with potentially one income for a while, I would take a conservative approach.
Adding a regular amount to your share portfolio is not a silly idea. The rest can go into your offset and earn you a very safe above-inflation return.
Gearing into a property is just fine with a long-term view but I don’t want to see you squeezed by rising rates, possibly one income and a new baby.
You are doing all the right things. You have a good asset base and are building super and saving.
Personally, I’d see what happens on the family front before extending yourselves but remember that this is a personal decision for you and being conservative is only what I would do.