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Get started with a free strategy consultation and receive a copy of the Good Fortune Guide – written by James McFall, Managing Director Yield FP and 2020 National Finalist Certified Financial Planner of the Year to help educate you on your Financial Plan.

Time holding an asset can be the most effective strategy

If you are investing in a ‘growth’ asset, like shares or property, it is widely acknowledged that an investment time frame of over 7 years is appropriate. This gives the asset time to ride through a cycle and improves the likelihood that the additional risk and volatility you take on with these assets produce a better overall level of return than just putting your money into the risk-free asset of cash.

 

However, even if you are prepared to leave your money there for 7 years or more, it remains true that it may serve you best to leave it for considerably longer than that in the end.

 

At the end of the day, money is there to provide for your lifestyle, and the biggest financial goal we all share is to be in a position to self-fund our retirement. Therefore, it always pays to reconsider why the investment is being made in the first place.

 

There can be a million justifications for shifting money around for short-term needs, but investing for a longer time frame has more value than just managing your risk. There is also the value of compounding. Most people will have heard Albert Einstien’s quote “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it” and yet it is often forgotten about when investing.

 

If we look at an example, say you bought a property or portfolio of shares for $500,000. The common prudent practice would be to invest with a 7 + time frame, but let’s look at the difference if you were to leave this for say 30 years or sell it and reinvest the money say even every 10 years.

Investment Property Example

Assuming return is 6% growth; Individual earns $80,000; Purchase price is $500,000 with $27,000 of purchase costs, tax based on today’s rates including Medicare levy, then the net amount they can afford to invest after each sale is reinvested.

 

time holding an asset

 

The chart shows the net amount received upon sale after the 30th year.

 

As can be seen, the compounding benefit is huge and this is because you are not incurring the expenses that go with buying or selling an asset like agent fees or brokerage and stamp duty, but of even greater consequence is the deferral of capital gains tax.

 

Now what this does not consider is that there can be compelling reasons to alter your strategy. Possibly the investment does not look like it will deliver returns in line with the expectation or what you believe an alternative could provide, but it does demonstrate that there can be a lot of merit in leaving your investments alone to work for you throughout several asset cycles where possible.

 

We assist our clients to make informed investment decisions every day. Counseling about buying and selling and the emotion behind these decisions is one way we can add a huge amount of value if we can help ensure that you are making well-considered investment decisions that you are comfortable with.

 

Yield Financial Planners, will challenge your thinking and help you make well-informed choices that are within your risk comfort.

 

This article was also featured on the Financial Planning Association (FPA) website.

 

Important Note 
Any information provided here is general advice only and does not consider your objectives, financial situation or needs. This information should not be taken as comprehensive and does not constitute legal or financial advice. You should seek legal, financial or other professional advice before relying on any content. Yield Financial Planning is not responsible to you or anyone else for any loss suffered in connection with the use of this information. Information is only current at the date initially published.
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Who we serve – We help time poor professionals and business owners who intuitively know they should be doing more to improve their financial position and are seeking an expert to guide them on financial planning strategies. Our clients want personalised financial planning advice and to feel empowered and confident that they can achieve a secure transition to retirement.

What we do – We gain a deep understanding of your current financial position and preferences, what you value and want to achieve. We then help you develop a highly personalised financial plan, to show you how to make your money work harder for you. Ongoing we regularly monitor and measure progress against your plan projections, to show you how you’re tracking and help you manage change to your advantage.

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