Building wealth with regular savings is best path to investing
Have you ever wanted to become an investor, but aren’t sure of the best way to begin?
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Putting some money aside in a regular savings account is a good discipline to develop, according to Morgans’ Terri Bradford, but she suggests there are disadvantages to consider as well.
“With interest rates at record lows, the interest paid in a traditional savings account, if any, isn’t going to generate much of a return,” she says.
Bradford, who is Morgans’ National Manager of Wealth Management, says there are other options for investors just getting started.
“A bank account doesn’t give you any exposure to investment classes like Australian and international shares, property or bonds,” she says.
“And those investment classes have all provided better long-term returns than cash, even taking into account the inevitable market corrections from time to time”.
She says investing in a savings plan with a fund manager can be a good alternative.
“When you invest in a managed fund, you own ‘units’ in the fund. The value of the units will rise and fall in line with the assets owned by the fund, but historically, those assets have provided strong returns”.
Bradford says an investment of $1,000 is enough to get started with a managed fund, and additional payments can be made on a regular basis.
“Most managed funds accept regular monthly payments of as little as $100, usually as a direct debit from your bank account,” she says.
“This can make managed funds more cost-effective than investing directly in shares or exchange traded funds, which incur brokerage charges on every buy or sell transaction”.
By making regular payments, investors can also take advantage of what’s called ‘dollar cost averaging’, which can help smooth out investment returns.
“Investing consistently every month rather than trying to pick the market’s highs and lows is a proven strategy,” she says.
“When markets are low, your regular investment buys more units in the fund, and when markets are high, you buy fewer units”.
“As an example, when share markets fell sharply in March, an investor would have bought more units, which will rise in value when markets recover”.
Managed funds also bring the benefit of compound returns, as interest and distributions from the fund’s earnings are usually reinvested back in the fund.
“Over time this means the investment will actually grow more, as the investor is receiving interest on the distributions that have been reinvested,” Bradford says.
Managed funds can offer a level of flexibility not available from direct investment in shares or exchange traded funds.
“You can make withdrawals at any time, without incurring brokerage,” Bradford says.
“And if your needs change, you can switch between different investment options within the fund”.
Most managed funds give investors a wide investment menu, ranging from highly secure investments, to those with the potential for high long-term growth, like international shares.
Get in touch with your Morgans adviser or your nearest Morgans office to find out if investing in a managed fund is right for you.
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