Here’s where you should invest your money

When I tell people what I do, one of the first questions I’m asked never surprises me, “where should I invest my money?” I always struggle with this question, although it’s what we do in our firm each and everyday, because it’s such a difficult question. There’s so much more to it than the question that’s asked. When I respond with, “what are you investing for?”, people are generally stumped. However, the response is also always the same – and it never surprises me either…”to make money”. No sh*t! Why, what’s the money for? When investing, it’s super important to be very clear on what you’re doing, and why you’re doing it. It provides you with the clarity you need to make good investment decisions.

Nevertheless, in an attempt to answer this question, I decided to provide my point of view on major asset classes:


Cash is king. They say you should hold 3 months’ of expenses in cash. I don’t think there’s a hard and fast rule. It really depends on your situation and plans.

  • If you’re young, have a stable job, no intention on leaving your job, 3 months may do just fine. Sure, you won’t be getting much in return but it’ll go a long way in an emergency.
  • If however, you don’t want to be held hostage by your job, hold 12-18 months’ of expenses. This gives you the opportunity to work on your new idea – often referred to as ‘f*** you money’.
  • If you’re retiring or retired, hold 2-3 years’ worth of expenses. You never know when the next financial crisis will cut the income from your portfolio by 25%. It also helps avoid having to sell assets at fire sale prices.

Bonds/Fixed Income

This is where you’re going to get your diversification from your stocks and other risky assets such as property (if you need it). Having said this, if you can stomach the ups and downs of risky assets, and you’re not replying on the income, you could probably build a case not to invest. Personally, I don’t hold any bonds or fixed income (not personally or in my super fund). I can ride a 50% draw down on risky assets without feeling sick. Then again, I’ve also got time on my side. Others aren’t so fortunate.

If you’re retiring or retired, bonds will give you regular cash flow, and provide your portfolio with cushion – when you really need it. Okay, I can already hear you thinking it, what about rising rates and the impact on bonds?

To give you some indication of the performance and behaviour of bonds over the last 31 years, I’ve prepared the below table. It shows us the average return for a world bond index, as well as the best and worst returns and when they occurred (click for larger image):

Source: Returns 2.0

If you’re not convinced, let’s go back even further and see what happens in bond bear markets. Consider the post-war period (1941-1982) when yields on the US 10 year went from 2% to 15%. You know what the worst loss during this time was? 5.01% in 1969 – fairly mild. In fact the average loss during this time was 2.1%. During this same time, inflation averaged 4.49%. Inflation was what hurt bond holders, doing twice as much damage than the impact of rising rates.

Here’s the list:

Source: Ben Carlson

As long as your holding bonds for the right reasons, income, diversification, greater price stability etc., I believe there is a genuine need for bonds in a well diversified portfolio.


First thing’s first, pay off your home loan they say. I totally agree with this concept. If however, you’re in a position to do so, why not invest at the same time?

Personally, I believe most investors should hold property in their portfolio. The downside however, is that it’s a lumpy asset. Especially at current prices, it’s not cheap. Rental income doesn’t get me excited, so what is it? Land. Pure and simple.

I’d be looking for property with development potential (I’m talking residential property – I personally don’t have much experience in commercial property). Land is where the value is derived from, not the dwelling (IMO). Close to transport, freeways, shops, schools, and look for areas where government has a clear long-term plan.

If you’ve got a really long time horizon, 25+ years, look out, further out. I’m talking growth zones. There’s plenty of them – acres and acres of land. The problem is, it’s a 25+ year plan. Unfortunately most investors can’t see beyond the next 12 months, they lack patience.

With prices of dwellings rising so rapidly, it makes it difficult to see exceptional value right now. Then again, it all depends on why you’re buying.

Here’s where Australia’s house prices (real) are (orange line) relative to their long term-trend (blue line). According to AMP, currently they’re sitting around 14% above it’s long-term trend. If you’re buying your family home, which your going to live in for the next 20+ years, and your telling me you think you may be paying $200,000 over the odds. If it’s the property you really want, I say who cares. It always goes back to why your investing.

Source: AMP Capital


If you want your investments to grow over time, you should be looking at a portfolio of shares. The allocation of and the factors you tilt toward will be dictated by your personal needs and tolerance for risk. Whether it’s large, ‘blue chip’ stocks, or small company stocks, which are more volatile, however have provided a greater return of the long run.

Currently, the broad Australian share market is generating income of around 4.5% pa plus franking credits. You’re certainly not going to get this from cash, fixed income, or rental yield (residential).

To give you some indication of the performance and behaviour of Australian shares over the last 31 years, I’ve prepared the below table. It shows us the average return for the All Ordinaries Index, as well as the best and worst returns and when they occurred (click for larger image):

Source: Returns 2.0

As you can see, the shorter your time frame, 1, 3 and even 5 years, the return range is very wide (look at the best and worst returns). Once you move your time horizon to 10+ years, your return range is much narrower. In fact, your worst 10 year return was 4.51% pa! Interestingly, the average return over all the periods except 1 year, are within 34 basis points of each other.

Done properly, a share portfolio could help achieve many objectives, whether it’s to fund your child’s education, help them buy their first home (refer to my comments on property), provide you with a regular income stream whilst growing your wealth, or be the engine room for your retirement.

If you’ve got the time and the patience, you will be handsomely rewarded over the long run. The next 12 months? I have absolutely no idea. And to tell you the truth, no body does.

Bringing it all together

Over long periods of time, your investments will compensate you for the risk you’ve taken. Risk and return is not dead and diversification still works.

Source: AMP Capital

There are many cases that can be built to invest is so many different asset classes. Whatever the investment, it needs to be right for you and your why. Be clear on what you want and reverse engineer it, the investment decision will be much easier.