Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noelwhit@gmail.com
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noelwhit@gmail.com

Noel Whittaker: The excitement of shares

WE ARE now well into the new financial year, and the stock market has made a bad start with a big fall last week. Even though stock market falls can be scary, keep in mind there are three basic areas where we can invest our money - cash, property and shares.

Now it's a good feeling to have plenty of cash in the bank, but the problem with cash is that it has no tax benefits, gives you no chance of any capital gain and is eroded by inflation.  A return of $3000 on a deposit of $100,000 sounds attractive, but tax could take $1470 leaving you with a net return of $1530 or 1.5% - take off 3.0% for inflation and you are left with a net negative of 1.5%.   This is why holding cash over the long-term is one of the worst investment strategies of all.

Even if interest rates rise, you would need an after tax return of at least 3% on your term deposits to break even.

This leaves us with the good old faithfuls - property and shares.  It's important to have an interest in both these camps, but it's just as important to understand that they behave in very different ways.  It's highly unlikely that your property will lose 30 percent of its value in a downturn, but there are ongoing costs such as maintenance, rates and land tax and it can be a long drawn out process if you ever try to sell it.  Furthermore, if you opt for non residential property, you can find yourself stuck with vacancies of a year or longer.

Shares will give you a much more exciting ride because their values will bounce around, but the big advantage of them is that you can buy and sell in small parcels, they provide tax advantaged income by way of franked dividends and over the long term, have been the best performing asset class of all with a return of 9% per annum for the last ten years.

Over the last two years the Australian share market has given us 19.6% per annum over the last two years even after taking the present slump into account   That's hard to beat.



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