Structures for Regular Investment Plans

Person Hand Inserting Coin In Piggybank

By now hopefully you’ve resolved to make 2017 your best year financially (at least up until this point)…and amongst other things to commence a longer term regular investment plan – for your own future financial freedom, and potentially for education funding if you have young kids. But where do you start…and what should you invest in?

These days there is no shortage of things to invest in. And there lies the major issue for many Gen Xer’s and Gen Y’s…we are overwhelmed for investment choice. Plus, just like most work places on a Monday morning following an AFL or NRL weekend…everyone has an opinion (and of course everyone is an expert!). However, what’s right for one person isn’t necessarily right for another. Your investment decisions should be made in the context of your goals and circumstances and nobody else’s.

As we covered in Wealth Creation for Generation X – Where should you invest your money? how you invest money should largely be driven by the time frame that your money can be invested for before you need access to it. You should only invest in growth assets like shares and property if you are able and willing to hold on to these investments for the long term in order to ride out the inevitable volatility and still achieve strong long term returns.

When it comes to The Power of a Regular Investment Plan these investments should form part of your “long term bucket” with a minimum time frame of 7-10+ years to allow time to allow for compound growth…ride out occasional bad years, and to take advantage of dollar cost averaging.

Along with the time frame that funds can be invested for, other key considerations in deciding what structure to use for a Regular Investment Plan are;

  • Diversification
  • Your individual risk tolerance, and
  • Managing costs

Let’s say you’ve resolved to invest $500 per month into a Regular Investment Plan as part of your longer term wealth creation strategy and, as it’s for the long term, you are comfortable with a “Growth” mix of assets (which would typically have around 80% exposure to growth assets such as Shares & Property and around 20% exposure to defensive assets such as Cash, Bonds and Fixed Interest)…what are your options?

Many people are comfortable buying their own shares via various online share trading platforms. Whilst that can work well for people who have the time and the knowledge…it doesn’t necessarily work well for regular investment plans. Transaction costs on online share trading platforms can be $20-$30 per trade – which as a % of $500 is a big number. Plus, this is only for shares in one company…not exactly ideal diversification. But any more than that and the costs would skyrocket.

In my opinion the best way to structure a Regular Investment Plan is to keep things simple and invest in a Managed Fund or Separately Managed Account structure – in order to gain reasonable diversification and to keep transaction costs low.

Managed Funds can either be “Diversified” or “Sector Specific”. Diversified funds can have exposure to all the main asset classes in line with various risk tolerances depending upon the style of fund i.e. Balanced, Conservative, Aggressive etc. Sector Specific funds just invest in the one asset class that they are experts in i.e. Australian Shares, International Shares, Government Bonds etc. If a regular investment plan is established to make automated monthly contributions via direct debt or Bpay, typically there are nil, or very little, transaction fees on the new investment. With Managed Funds you buy “units” in the fund and then the funds invest in the various assets. However you don’t own the assets directly…you own the units. And typically with traditional Managed Fund there is very little if any transparency with the underlying assets.

That’s why structures such as Separately Managed Accounts have been quite popular over the last few years. In my opinion they are the way of the future, and one of the best ways to structure a regular investment plan for the long term. Separately Managed Accounts (SMA) have the benefits of Managed Funds in that they can provide diversification across the various asset classes, and can have minimal transaction fees on regular investment plans. However the main advantages of SMA’s over Managed Funds are transparency and direct ownership. With SMA’s the investor holds the underlying investment directly rather than via units. This way the investor can see what investments they actually hold while having the day to day investment decisions being made by the professional investment managers and not be involved in the process. This means for instance that the investor sees their specific shares in the Australian share exposure (and owns them directly) or Exchange Traded Funds (ETF’s) in relation to International shares, Property, or Bonds. It’s the best of both worlds; transparency, direct ownership & low cost combined with diversification, professional management, and no time commitment.

However, remember that “what you do on a regular basis matters far more than what you might do only every once in a while”. Regardless of the investment structure choice (whether it be a managed fund, separately managed account or direct shares), it’s the habit of “taking money off yourself” and investing money regularly that will create far more wealth than individual investment decisions – provided the investment is at least in a diversified mix of high quality investments that are appropriate for your risk tolerance and investment time frame.

Matthew Morrison is the Director of Wealth Advisory at The Practice, a Personal Wealth Advisory & Business Advisory firm based in Parkville, Melbourne. Matt along with The Practice team are committed to and passionate about developing & implementing wealth creation strategies for clients to enable them to Fuel their Family’s Future (while protecting them along the journey).

Matt and The Practice team can be contacted via http://thepractice.com.au or (03) 8888 4000.

Disclaimer – the above views are general advice only and are purely the opinions of the author. It’s important that you seek professional advice tailored to your needs before taking action regarding your financial future.

6 thoughts on “Structures for Regular Investment Plans

  1. Pingback: Wealth Creation for Gen X – What type of super fund is best for you? | Wealth Creation for Generation X

  2. Hi Matthew,
    With regards to managed funds, am I correct in assuming you need to lay out quite a bit to start investing in managed funds? From what I can find on the internet, you need upwards of $25,000 to start off with.
    Is this still the case? Or are there other ways I can START and regularly contribute to a managed fund or an SMA?

    From some one is super naïve about all this investing stuff.

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    • Hi Jess, great question. Yes typically there is a high minimum balance required if approaching wholesale funds directly, anywhere from $25k-$500k. That’s one of the benefits of Wrap accounts & SMA’s – wholesale pricing with a lower minimum required of around $1,000 & $100 per month. Wrap accounts and SMAs are only generally only available via licensed financial advice firms though. Hope this helps. Thanks, Matt

      Like

  3. Pingback: Wealth Creation for Gen X – How to buy property using Superannuation | Wealth Creation for Generation X

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