ADVICE

Figuring out if banking your money or investing it is the best strategy for your finances

Where is the best place to put your money? Picture: Shutterstock.
Where is the best place to put your money? Picture: Shutterstock.

It was 4pm on New Year's Eve and I was driving home from golf when I got a phone call from a journalist seeking a comment on finance for the 6pm news.

She asked what she thought was a simple question: "If you had $100,000 would you put it in the bank or invest it in shares?"

Well, it's a simple enough question, but unfortunately there is no simple answer.

I started to explain that I'd need to know more than that, like the temperament of the investor, their risk profile and what other assets they had - but that was all too much information for a 10-second soundbite.

Nonetheless, it's a fair question in these uncertain days, and one that highlights the role of cash in a portfolio.

You would normally keep some cash in the portfolio to provide liquidity - I recommend keeping about three years' expected expenditure in cash - but it is one of the worst assets to hold long-term, so it's not usually a good idea to have much more than that.

Why? Because there is no chance of capital gain and no tax concessions on the income. Worse still, at today's interest rates, you are losing money to inflation because the interest rate the bank will give you on cash is far less than the inflation rate.

So for investing you are left with a choice between the old favourites of property and shares.

Given the difficulty of finding a cheap property right now - you would need at least $50,000 for a deposit on an investment property - for most people the best choice is likely to be my personal favourite, shares.

You can start with just $500, cash in the investment in whole or in part on a day's notice, and you never face recurring expenditure like rates, maintenance, land tax and insurance. But of course, shares are volatile, which is why you need to hold them for the long-term, and have cash to draw on when the market is down.

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As well, your overall situation must be taken into account. As I explained to my new friend from the TV station, if all your assets are in cash today, it would make sense to move some into shares. And if you were extremely nervous you could use the proven strategy of dollar-cost averaging, in which you invest a set sum every month into shares over a period of time.

This means you don't buy all your shares at a peak or trough, and if the market does fall, you are buying assets cheaply before they recover. But I also pointed out that if you had already had $900,000 worth of shares, it would make sense to keep $100,000 in cash in reserve.

Of course once you mention shares everybody wants to know what shares to buy. Given my own chequered experience over the long-haul picking shares, I think the average investor is much better off sticking with a simple listed index tracker fund like STW or VAS. Given they track the index, they cannot go broke; they are paying around 4 per cent per annum 80 per cent franked; and they will move up and down as the share market does. It's like having a bet on every horse in the race.

And you don't even need to choose share investments on your own. If you don't mind losing access to your investment capital until you reach your preservation age, which is 60 for most people, you could simply deposit any spare money into your superannuation fund and let the fund manager make all the decisions.

They will ensure that you get a good mix of shares, property and cash. If appropriate, you could also make a concessional contribution for which you can claim a tax deduction.

The limit for these is $27,500 a year, which includes the employer contribution. Alternatively, you could just make a non-concessional contribution on which there is no entry tax.

The reality is that there are no simple answers when you are investing. There are many factors to take into account. We can talk about more of those another day.

Noel answers your money questions

Question

I am in my late 40s and have $10,000 which is surplus money that I need to invest for just six months. I have already used up the amount I am allowed to transfer to my fixed rate home loan, but the fixed rate portion of this loan expires in April next year. My husband and I are employed full time and we plan to work for at least the next 10 years.

I do have a fixed investment loan (fixed till 2023), but I am hesitant to put the $10,000 into this account. Is it advisable to put the $10,000 into this fixed investment loan or are there any recommended short term investment strategies that I can adopt, so that I can withdraw the money when my owner-occupied fixed-loan expires? I have a debt of around $400,000 remaining on that loan.

Answer

You certainly don't want to be reducing an investment loan on which the interest would be tax-deductible, and there is no point in incurring penalties by making early repayments on fixed loans. I think your best option is to park the money in your bank account and then pay off your non-deductible housing loan when the fixed rate expires.

Question

I am 60 and my husband is 72. I want to retire in two years to spend more time with him and hopefully travel. I want to use the re-contribution strategy that you have mentioned from time to time and put $300,000 of his super into mine, leaving him with $150,000. I currently have $550,000 in my super. We would apply for a part pension for him when I retire but would still need to take some money out of my super, which I will leave in accumulation mode, from time to time to cover extra expenses.

Are any occasional lump sum withdrawals I make from super considered as income, and would I have to include the money in my tax return? Will the money I have in super affect my husband's part pension from Centrelink? These questions have been bothering me for some time as I would clearly need to use some of my super for us to have a comfortable retirement until age 67 when I would take an income stream.

Answer

Money in superannuation in your name will not be assessed by Centrelink until you reach pensionable age unless you start a pension from it. Therefore, it makes perfect sense to leave the money in accumulation mode until you reach pensionable age. Once you have retired you could make irregular withdrawals as needed and they will not be regarded as income, nor will there be any tax consequences. Your husbands pension should not be affected if you use these strategies.

Question

We have just sold the family home that was held in my wife's name only. We'll have about $1M residual to put somewhere after a downsizing purchase.

Is it possible to make super contributions? We're both over 65 and permanently retired, I have over $1.7 million in super - my wife has never had a super account. Is it possible for us both to contribute $300,000 into super even though the house was in my wife's name only?

Answer

John Perri of AMP Technical says that provided you both resided in the house being sold, and it was held for at least 10 years, both of you should be eligible to make downsizer contributions into super up to $300,000 each (assuming all other conditions are met as well).

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email your money questions to: noel@noelwhittaker.com.au
This story If you had $100,000 would you bank it or invest in shares? first appeared on The Canberra Times.