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From the UK to Australia, the desire to build a comfortable financial future is a pretty common goal. But navigating the world of investing can feel daunting, especially when you’re just starting out or making the big shift to retirement.

This short guide takes a look the fundamentals of investing, explains some of the jargon and hopefully, takes away some of the confusion that often prevents people from taking the first step.

What types of investments are there?

Investment assets come in all shapes and sizes – the most common of which include shares, bonds, managed funds and property. What’s more, in Australia, pension funds (aka superannuation funds) can also be considered as an investment platform with many funds letting their members choose how their super is invested, even after they’ve retired. More detail is here.

Deciding on the type of investment can seem tricky at first, but a good initial step is to ask three key questions:

• How comfortable am I with taking risks?
• How much money do I have to invest?
• How quickly would I want to sell (i.e. ‘liquidate’) my investments?

Understanding risk appetite

Everyone’s risk appetite is different and, in fact, can change as we get older. That’s why it’s important to work out whether you’re comfortable with short-term fluctuations for potentially higher returns (high-risk), or you prefer steadier growth with lower risk? This will determine the investment mix that best suits you.

If investing for the long-term, we may feel quite at ease with higher-risk and growth potential when we’re younger, as we have more time to make up for occasional losses. However, as we get older, we can typically drift towards lower-risk ‘conservative’ options, accepting that the growth may not be as dynamic, but our investments may be more secure.

Knowing your risk appetite will help you decide what type of investments are best for you.

The investment landscape

So, let’s explore the mainstays of the investment world:

• Shares (Stocks): Basically owning a piece of a company. Shares are generally traded on a stock exchange and bought through a human or digital broker. They can potentially offer high returns but can also be volatile, so are regarded as higher-risk.
• Exchange-traded funds (ETFs): These are a popular, low-fee way of investing, where you buy shares in a pre-determined basket of securities (like shares or bonds), instead of a single company. There is huge array of categories you can invest in and their risk depends on the category.

Like stocks and shares, they’re known as ‘liquid assets’ because they’re usually fairly easy to sell (aka ‘liquidate’) if you need quick access to cash.

• Managed funds: Offered by investment firms and other financial institutions, these individual funds are monitored and managed by experts. They’ll make adjustments to the funds’ investments to try and maximise returns. Depending on what the fund invests in, they can be lower, moderate or higher-risk.
• Property: Focusing on real estate for rental income or capital appreciation, property investment in the UK and Australia is generally regarded as a safer option. However, it requires significant capital, carries maintenance and statutory costs, and can take longer to sell than shares for example.
• Bonds: Essentially, lending money to a government or company. Their return is often fixed for a period, and because of who your lending to, they may provide lower risk and a more predictable income.
• Cash and term deposits: Keeping your money in a bank or other financial institution is generally considered relatively safe, though returns can be lower or slower than other investments, because they depend on the current interest rates.
• Pensions and superannuation: Employer-sponsored retirement plans and superannuation funds are common. This is particularly so in Australia where all employees have super paid by their employer, and can often choose how their money is invested – for example in growth assets, stable investments or in sustainable industries.

An investment journey: from starter to retiree

Your investment approach will probably evolve alongside your life stages. Here’s a general roadmap:

• Starting out: If you’re young, you might have a higher risk tolerance, and may consider a mix of growth-oriented investments like shares and ETFs, with a few safer options like term deposits for stability.
• Building wealth: As your income grows, it can be smart to focus on diversification. This could mean investing in different asset classes (like shares and property) and sectors (like technology and healthcare).
• Nearing retirement: As we enter our retirement years, most people shift focus towards income-generating and lower-risk investments like bonds, cash and income-producing property. This can help secure a steady stream of income in your golden years.

The power of diversification (and not putting all your eggs in one basket!)

The golden rule of investing is diversification. This means spreading your investments across different asset classes and sectors if you can, to help soften the impact of a downturn in one particular asset. For example, a dip in the share market might not significantly impact your overall portfolio if you have a variety of investment types such as shares, cash and bonds.

Common ways to diversify include:

• Investing in a combination of shares, bonds, property, and cash (or term deposits).
• Buying both local and overseas shares, ETFs etc.
• Including a mix of large, established companies (aka large-cap and ‘blue chip’) and smaller, high-potential companies (small-cap).
• Spreading investments across different sectors such as tech, healthcare, retail or property trusts.

Taking the next step

This is just a general guide, and it’s necessary to think about your individual circumstances. Consulting a financial advisor can help you create an investment strategy aligned with your goals, risk tolerance, financial situation and stage in life.

Making the most of gainful surprises

When we think of financial surprises it’s usually in the form of an unplanned tax debt, a sudden bill, or some irksome expense that comes out of the blue.

Every now and then though, luck (or, more likely circumstance) decides to give us a break and sends some handy extra cash our way. Sometimes it’s a bittersweet inheritance, sometimes it’s from an upheaval, such as a severance package, and for the rare few, it simply comes from holding that one, lucky lottery ticket. But, no matter how the windfall came about, once its reality starts to sink in, the mind naturally leans towards what to do with it.

A smart strategy may be to invest it for a more comfortable retirement. But if you put it all in a term deposit or add to an investment portfolio, the earnings will generally incur tax. A more effective option, may be to contribute to your 401(k) workplace plan. But beware, like other countries, such as Australia, there are actually limits to how much you can plough in each year. In the US, these caps are called 401(k) Employee Annual Contribution Limits.

Windfalls and 401(k) plans

There are two types of 401(k) options. The standard ‘Traditional’ version gives you an up-front tax break, while the ‘Roth 401(k)’ gives you a tax-free income in retirement (since you’ve already paid tax on the money you’ve contributed).

Either way though, the annual limits are the same.

Currently (in 2023) the contribution limits for individuals are:

Under 50yo: $22,500 total per year

50yo or older: $30,000 total per year

The limit for over-50s is higher thanks to the $7,500 catch-up contribution that’s available once you hit 50.

Provided you opened your 401(k) at least five years beforehand, using a windfall to boost your retirement gives you the benefit of additional tax-free income stream when you reach 59 years and six months.

Even if retirement for you is years away, investing surplus cash in your 401(k) up to the maximums can still be a sound strategy, as long as your current miserly approach to spending is covering your needs right now.

Windfalls, investments and tax

One side-effect of a sudden rush of cash to the hip pocket, can be a sudden rush of blood to the head – figuratively speaking at least.

Even smart minds may briefly picture a shiny Mercedes parked outside the new beach house, but such visions should be quickly shrouded by more sensible and astute ideas.

As previously mentioned, interest accrued on term deposits and earnings on investments generally attract some form of tax, and while the tax shouldn’t exceed your returns, they can take a fair bite out of them. That’s why, it’s always shrewd to seek professional advice if your windfall is substantial – especially if you want to maximise the tax advantages.

Of course, some bonanzas are taxed at the outset.

Lottery wins across the US are taxed at federal level as they’re considered to be part of your income. And then depending on where you live, even more may be collected by the state coffers. The same goes for severance packages.

On the flip-side, inheritances are not taxed, except in a handful of states¹ (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania), and even then, there are conditions based on the amount you inherit, and how you’re related to your benefactor.

This means that, outside of contributing to a 401(k), the source of your financial bonus may influence where and how you invest.

Ultimately though, if you find yourself the recipient of an unexpected windfall, the best advice is professional advice.

Let the emotions settle before making any big decisions, make an appointment with a financial planner, and definitely do not duck into a luxury auto showroom on the way.

I’ve now been living in my (really my mom’s) new house for a little over a week. The house buying process was not without a few bumps in the road. We’ll be dealing with some of those bumps for a while.

Just three days before the original closing date the mortgage company did my employment verification and since I wasn’t employed with my employer at that time, my name had to be taken off the mortgage and closing was pushed back a week. That was a bummer for me. I ended up being rehired just one day after closing. The timing didn’t quite work out for me there.

We will add my name to the title once the mortgage has been paid off. Alternatively, we’ll add my name to the title if we’re able to refinance and add my name to the mortgage. It seems unlikely that a refinance will make sense though. We have a 3.375% APR. We were told we didn’t qualify for a lower interest rate due to the small ($50k) size of the mortgage. The small mortgage means it probably won’t be worth paying the required fees to refinance the mortgage.

Although my name isn’t on the mortgage I will be paying it. The payments are only $357 a month for 15 years which makes it cheap rent for me. We hope to have the mortgage paid off well before the 15 years are up. My mom will be paying the property taxes and insurance which are a little less than $175 a month. My mom volunteered to also pay the utilities if I match that payment with an extra mortgage payment.

The house looks pretty nice from the front. However, when we moved in the inside was filthy and the backyard was a mess and full of junk. It was in the purchase contract that the seller had to remove the junk in the backyard, but he just didn’t do it. He also refused to make a financial concession for failing to fulfill his contractual duty to clear the back yard. The realtors didn’t want to lose the sale and they hired and paid for a cleaning lady to do a quick clean of the house and for someone to haul off the junk from the back yard. That improved things a lot, but we still had a lot of work to do to get things to what we consider an acceptable level. We’ll have projects for months to get things how we would like them.

For now buying the house gives me a permanent home and cheap rent. Sometime in the future it will provide me with a bit of a financial windfall. Even with the bumps in the road I think buying the house with my mom was a good idea and will benefit both of us.

My initial plan for this summer was to spend a week in Japan, followed by a couple of months in Thailand, then coming home in September by way of Hong Kong and London. That would have made an around the world trip. Due to the travel restrictions caused by the global pandemic, all of those plans had to be scrapped.

My plan B was to hike the Appalachian Trail instead. I’ve hiked the AT all the way to the Massachusetts/Vermont border. Both MA and VT are currently requiring out of state visitors to quarantine for 14 days. That requirement makes hiking the AT a no go for me. Perhaps those restrictions will be lifted later this year, but for now continuing my section hike of the AT isn’t an option.

This left me with plan C, which is buying a house with my mom. We were going to look into buying a house together when I returned from my overseas trip. Since that trip didn’t happen we went ahead with the house buying plan.

We should be closing on the new home this Thursday. My mom’s house already sold a couple of weeks ago leaving us homeless until we close on the new house. We’ve been staying at my aunt’s house since it didn’t make sense to rent a place for such a short term and we didn’t want to actually be homeless. Hopefully, everything will go smoothly and we can finish moving on Friday. It will be nice to be in a permanent home again.

The house is a small upgrade from my mom’s previous house. She sold her old house for $135,000 and we’re buying the new house for $170,000. Where I live $170k can buy a pretty nice house. The new house is also in a much nicer neighborhood so it should appreciate faster than the old house.

The proceeds from the sale of the old house are being used as a down payment on the new house and we’re taking out a $50,000 mortgage for the rest. I’ll be responsible for paying the mortgage, which will be about $350 a month since we got a 15-year mortgage and won’t have escrow. That’s a good deal since it is cheaper than rent. I’ll also be getting 50% equity in the new house. I’m basically getting my inheritance early. The equity in the new house minus the mortgage liability will result in about a $35,000 increase in my net worth. That isn’t money I can spend today, but someday it will be a nice nest egg.

My mom is wanting to pay off the mortgage quickly. I’m thinking we should be able to pay it off in 7 or 8 years, if not sooner. By the time mortgage is paid, I’ll hopefully be ready to retire. Not having a house payment would make it much easier to retire. A lot can change in 7 or 8 years so we will see what happens.

I’ll write another post once the house purchase and move-in has been completed.