In simple terms, a ‘Direct Investment’ is putting your money into an asset that you have an element of control over. Here’s the technical term for those who are interested: the investment of funds into an asset that you, or an entity that you own, purchases that provides you the investor with an element of control over the investment.
Generally speaking the investments do not have ongoing percentage based management fees that increase with the size or quantity of your investment.
Typically we refer to listed shares, term deposits and property as direct investments. Direct Investments do not include managed funds, retail property trusts or mortgage funds.
Regardless of the investment, an investor needs to achieve a return greater than inflation after taking into account costs and taxation to maintain a profitable investment. If you’re in the 30% tax bracket, you need a return of 5% or more to see a return. Ask us about the math, we’re happy to go through it with you. Obviously the higher the tax bracket the higher the return will need to be.
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Despite the strong bull-market following the low in March 2003 through to 2007, managed funds were reporting average annual returns of around 8 per cent over the preceding 10 year period. And with inflation running at around 3 per cent during that time, anyone who invested in managed funds would have achieved minimal growth. Had you invested directly in the top ten stocks on the Australian share market, however, your returns would have surpassed the average managed fund return by a significant margin. This is because the Australian share market returns around 12 per cent per annum over any 10-year period, which is around 60 per cent better than the average managed fund.
Supposedly, a major selling point of managed funds is the ability to diversify across other asset classes such as cash and bonds. But while an investment in cash and/or bonds is ‘safe’, it usually implies a non-growth investment after taking into account taxation and inflation. As we know, interest rates have remained relatively low over the past decade and with the sub-prime mortgage meltdown in recent years, rates are at the lowest they have been in 30 years. In many cases, however, the dividend income from owning good shares far out strips the return of having money invested in cash.
The major banks are currently paying around four percent to place your money in a fixed term deposit, which means after tax, your investment is simply treading water. But if you owned shares directly in one of the big four banks, you would receive a dividend of around 6 per cent fully franked (tax paid), which is equivalent to around 8 per cent gross.
Managed funds potentially diversify your investment portfolio but perhaps they over-diversify? The question of whether managed funds actually add value to their investments over and above what you could do yourself by investing in a diverse portfolio of shares has to be considered.
Direct shares offer the flexibility to move funds around swiftly which is a distinct advantage over managed funds simply because an investor can exit a volatile market very quickly and therefore reduce the risk on a portfolio. Owning direct shares puts you in control of when to buy and sell which can have a positive effect on the taxation consequences of either buying or selling.
Owning direct investments does not have to be complex in fact in some respects it is simpler and more transparent than owning managed funds. With the right advice it is possible to relatively easily diversify your investments across the asset classes of cash, fixed interest, property and shares without the need for any managed funds.
As with any investment it is important to conduct appropriate research and consider these investments in the overall context of your financial goals and objectives. Sinclair Financial Group can assist you in considering the appropriateness of these types of investments for you.
GENERAL ADVICE WARNING
This information is of a general nature only and you need to seek professional advice based upon your own personal circumstances before acting. Although we consider this material reliable, no warranty is given and no liability is accepted for any statement or opinion or for any error or omission.