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Top investment tips

Author: NICOLE PEDERSEN-MCKINNON Date: 26/12/2004 Source: SAG Publication: The Sunday Age Section: Holiday guide

Wealth starts with saving say the money gurus, writes Nicole Pedersen-McKinnon. CAN this many of Australia's investment professionals be wrong? I suppose it's possible but when nearly half of the MDs, chief execs and straight-out equity gurus who featured in AFR Investor's Portfolio Peek gave regular saving as their No.1 financial tip, we sat up and took notice.

You should too.

Perpetual Investments chief investment officer Emilio Gonzalez put it nicely:

"(Saving is) the biggest value-add of any decision you'll make."

The old "pay yourself first" principle made an appearance, too. Hans Kunnen, head of investment markets research at Colonial First State, gave as his top tip: "Set aside something for saving first, not after you've spent because there'll be nothing left."

Overwhelmingly, the experts' advice was that the earlier you start saving the better. The reason? As AFR Investor share tipster and chairman of DirectPortfolio John Aldersley put it: compounding.

MAKE THE MOST OF MATHS

Compounding refers to interest on interest and it means an exponential increase in the value of your funds when you reinvest the income.

Popular belief has it that not just Aldersley but none other than Albert Einstein considered compounding an incredibly powerful investment concept.

The "rule of 72" will give you an idea of just how powerful. By dividing 72 by any given interest rate, you can find out how many years it would take to double your money at that rate. So at 8 per cent it would take nine years to double (72/8 = 9).

It works the other way too divide 72 by the number of years in which you would like to double your money for the required interest rate. If you have 10 years, for example, you would need to earn 7.2 per cent a year (72/10 = 7.2).

But I digress. Another investment concept that won the professionals' vote in Investor this year was dollar cost averaging.

This is a concept that applies to regular savings and means you get more shares when the price is low and fewer shares when it is high. As a result, the average price you will pay per share will come down over time.

So said AMP Capital Investors' head of investment strategy Shane Oliver: "Have a regular investment plan and a regular allocation of money to investments. I think it's possible to pick market trends but I don't have the time and it takes a lot of effort. So you're better off avoiding trying to get your timing right."

In other words, time in the market is better than timing the market. And dollar cost averaging removes the risk of investing a lump sum at the very wrong moment.

ASK FOR HELP

Something of a theme emerged this year when it came to seeking advice. Challenger Financial head of equities Peter Greentree supplemented his tip to save with "get yourself a financial planner".

To which MLC chief executive Peter Scott added: "Australia's financial system is among the most complex in the world and it's extremely hard to succeed in it on your own. Don't wait to seek advice until you are about to retire. Good financial education and advice can help you achieve many of your lifestyle goals."

FOLLOW THE PROVEN DOCTRINES

Then there were the tips on successful investment technique

CommSec chief equities economist Craig James couldn't stress enough the importance of spreading your risk: "Diversify, diversify, diversify."

ING Investment Management head of private equity operations Jon Schahinger said:

"Learn to take a loss and take it early."

And Investors Advantage and Clime Asset Management director Roger Montgomery said: "Pay a lower price than the value you receive."

But it was all about retaining control for Merrill Lynch joint chief investment officer Russell Maddox. "Try to stay in control and avoid situations or investments whose failure to deliver hoped-for returns will force large-scale changes in financial or lifestyle priorities," he said.

It was also revealed that BT Financial Group portfolio manager Paul Hannan shares his top tip with world renowned investor Warren Buffett, chairman of Berkshire Hathaway: "Invest only in what you can understand. For me, that's the key driver of my investment philosophy."

To his advice to harness the power of compounding, DirectPortfolio's Aldersley added: "Learn the difference between volatility and risk. Too many investors get out of the market when there's a downturn. They should do the opposite."

PICK THE TRENDS

Some of our experts got specific, too.

Tyndall Asset Management chief executive Michael Good advised thinking strategically. "Have an overall investment strategy," he said. "If this includes some equity trading, sell popular investments early. Try to visualise what market conditions will be like in a few years' time and look for investment opportunities that are good value now and are also likely to become part of the next trend."

But this is unlikely to be bonds, says VanEyk Research managing director Stephen van Eyk.

"It is fairly obvious from here that interest rates are not going to consistently fall from current levels and may actually rise," he said. "Therefore, although shares will still perform the best of any asset classes (say, 6 to 7 per cent per annum), bonds, which conservative investors hold for the majority of their portfolios based on the past 20 years, may actually perform badly."

"Investors should reassess their portfolios by discussing alternatives with their advisers, being careful to take liquidity into account."

For Investors Mutual managing director Anton Tagliaferro, the best place for long- term investment is industrial shares. "The fact that industrial shares tend to perform well means, over time, you get good results," he said.

If all that fails though, listen to the advice of Zurich director of investments Matthew Drennan: "Avoid playing poker machines."