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Fixed Term Versus Dividends

Written by R. A. Stewart

Two excellent wealth building vehicles are fixed term deposits and dividends paying shares. Both aim to put your capital at work but they operate differently as far as risk, return, and tax treatment goes.

Fixed-term interest

Your money is invested for a predetermined period of time, this could be for months or years for a guaranteed interest rate.

Investors in fixed-interest deposits know the return they are receiving on their investment.

Dividends

Dividends are made by the companies to their shareholders; they represent dividends of the company’s pot-tax profit.

Investors in companies on the share market do not know the return they are receiving. It is the directors who decide how much to distribute to shareholders.

Investors in the share market aim to receive a regular income through  dividends and capital growth of their shares. (share price appreciation)

Key Differences

Fixed-term interest

  1. Capital Preservation and Steady income.
  2. Low capital risk
  3. Fixed and guaranteed income
  4. May lag inflation depending on the interest rate.
  5. Money not available until maturity

Dividends

  1. Income growth and capital appreciation
  2. Moderate to high capital risk due to market volatility.
  3. Variable income depending on how well the company is doing.
  4. Shares have historically outpaced inflation.
  5. High liquidity. Shares can be sold when markets are open.

Which is more risky?

The main risk with fixed term interest is inflation risk where the purchasing power of your money decreases with rising costs. The other factor to consider is that the market rate of interest may increase during the time you are locked into a lower interest rate.

The main advantage with shares is that it can be quickly turned into cash when needed. The flip side to this is that the markets may be down just when you need that money but thanks to managed funds and micro investing platforms it is possible to invest in such a way as to minimize the risk of being on the losing side of a downturn in the markets.

It is a matter of investing according to your timeline.

If you need the money within twelve months or the money needs to be on call then a personal bank account paying next to no interest may be your best option. However, fixed term interest may be your best option, if you have $5,000 to invest and need that money for say, a car in six months to a year. Your other option if you are in that position is to invest in a conservative fund. Your money will be invested in shares but in less risky companies.

What about the medium to long-term?

Shares have traditionally outperformed returns on fixed-term interest in the long run. 

If your timeline is long-term then past history indicates that you are better off investing in shares.

It is important to stay calm when the markets are down and your retirement fund balance has dropped. Just continue to live your life, working and making contributions to your retirement fund and let the final balance take care of itself.

About this article

This article is not financial advice and may not be applicable to your personal circumstances therefore discretion is advised. You may use this article as content for your blog or ebook.

Read my other articles on www.robertastewart.com

 

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Investing in New Listings

Investing in New Listings

Written by R. A. Stewart

Is it worthwhile buying shares in New Listings, also known as Initial Public Offerings?

I have read that these have the potential for significant early gains, but they can at the same time be risky. 

Pros

There can be benefits in investing in new listings.  They are:

  1. High growth potential if the company performs well in the early stages
  2. You get the chance to invest at the offering price before the company lists on the stock exchange.
  3. The IPO process has stringent rules meaning there is increased scrutiny on the company prior to listing.
  4. Newly listed companies are often hyped up meaning that the share price rises sharply soon after listing.

Cons

There are some downfalls of investing in these new public offerings. They are:

  1. There is limited data to use for making a future prediction.
  2. Shares can be highly volatile if the market is down or the company fails to meet its expectations.
  3. If the New listing is oversubscribed you may receive fewer shares than you requested.
  4. The new listing can be overhyped by its promoters that the price per share is set too high leading to a drop in the share price once the trading starts.

Things to consider

  1. Read the prospectus and do your research online to make sure you understand the risks involved.
  2. Company insiders may not be able to sell their shares for a set period of time and when this set period ends there may be a considerable drop in the share price.
  3. Access to new listings may not be available unless you have a brokerage account, however, they may be available through online platforms such as sharesies and robinhood which allow you to purchase shares with a minimum of investment.
  4. If you don’t have the time to research individual IPOs then maybe you can invest in an Exchange Traded Fund  (ETF). This way you are able to invest in a range of IPOs without trying to pick a single IPO.
  5. Monitor the stock after purchasing it to see how it is going. There are some influencing factors which determine the directions of the stock. This can be initial public demand and hype, market sentiment, and economic trends.
  6. My view is that Initial Public Offerings are not for long-term investing but something which can be part of your portfolio as an added interest. The same rules apply to initial public offerings as they do with any other company you are investing in. The questions you should be asking is:
  7. How does this fit into my financial strategy?
  8. Can I afford to lose this money?
  9. How have similar companies fared in the past?

In a nutshell you should do your own due diligence because you are the one who has to live with any financial decision made concerning your money.

About this article: The contents of this article are of the opinion of the writer and may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your blog/website or ebook.

Read my other articles on www.robertastewart.com

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Over caution can be costly when investin

Written by R. A. Stewart

“Never invest in the share market which you cannot afford to lose” is a saying that you may have heard a few times but is it good advice?

It all depends on what you are going to use the money for and how soon you need the money.

If the money is in your retirement fund and you are in your twenties or thirties then you will not need the money for another thirty or forty years and even then you may live another thirty or so years so the money won’t be needed for decades. A share market tumble will not make any difference to your current lifestyle. 

You have time on your side to recover from the lows of the markets.

If however, you are saving for a house deposit and require the money in less than five years then being a little more conservative with your money may be the way to go.

The worst thing which can happen is for you to withdraw your money for a house deposit just when  the markets are down and then a month or two later the share markets have rebounded.

It is all about taking a balanced approach.

There is no doubt that many investors are afraid to lose their money so they invest their retirement funds conservatively. The end result will be that they are left short-changed when they reach 65. 

Worst still, they react emotionally when the markets take a dive and shift their funds from balanced to conservative, then when the markets rebound they miss out on the rises which would have seen their retirement fund recover.

It is time not timing which is the key to creating wealth in the share market. Young people have an abundance of time on their side and the young astute investor can use this to their advantage to create their wealth.

Inflation reduces the spending power of your money and just leaving your money in the bank will erode the value of whatever is sitting in that account. If money sitting in the bank is for everyday expenses or an emergency fund then that is fine, but to get ahead one needs to become a long-term investor.

Your risk-profile is the factor which should determine how much risk you should take. Your age is one factor. New Zealand financial advisor, Frances Cook, says, “Subtract your age from 100, and the answer is the percentage of your money which should be in shares.”

I do know of people who have a much larger percentage of shares than Frances Cook’s formula suggests they should have. One elderly couple I know invests in the share market for the dividends which they use to pay for their health insurance.

It is for investors to decide what level of risk they are willing to take and to take responsibility for decisions they make. 

Investors must get over their fear of loss in order in order to make the most of the investment opportunities available. Playing it safe in the matter of finances and life in general will leave you feeling short-changed, when with a few more risks you would have achieved more with your money.

About this article

The contents of this article are of the opinion of the writer and may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your blog/website, or ebook.

Read my other articles on www.robertastewart.com

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Your investing risk profile and what it is.

Written by R. A. Stewart

Your risk profile is the level of risk you can take with your investments based on your personal circumstances and your timeline.

The number one question to ask before deciding where to invest your money is, “Will the loss of my capital affect my lifestyle?”

Here is an example of how this may occur. 

Suppose you are saving for a car and you decide to use an online investing platform such as sharesies or robinhood to save for that car. You also decide that you will invest your money in growth funds and your savings are going well for a while and just when you are a month away from  purchasing your car, the market takes a dive. (as it has after Trump imposed tariffs on imports).

Your planned purchase of that car now has to be put on hold which has affected your lifestyle.

On the flip side of this is that you can purchase more unit trusts than previously so that when the market rebounds your savings will grow faster.

There are three options when investing in managed funds; growth, balanced, or conservative. 

Growth funds have the most potential to grow your money but they are also the fund with the most risk.

Conservative funds are the safest option but they are also the least profitable.

Balanced funds are a combination of growth funds and conservative funds.

Your risk profile will determine where you are going to invest your money and this is dependent on when you need the money.

This can be classified into any one of three categories:

  1. Long-term money
  2. Medium-term money
  3. Short-term money.

It is possible to fall into more than one category as an investor depending on when you need to access your money.

For example: Your retirement fund if you are young is classed as long-term money, but your rainy day fund is short-term money.

Long-term money is money needed after five years.

Medium-term money is money needed between 1-5 years

Short-term money is money needed within a year.

Long-term money may be money saved for a house-deposit or your retirement.

Medium-term money might be money being saved for an overseas holiday or a vehicle.

Short-term money might be money being reserved for unexpected bills which crop up or an overseas holiday you intend to take within twelve months.

There are so many investing apps available these days that setting something up for a specific savings project is a simple process.

The current share market falls should not be much of a concern to investors who are in the correct type of funds. Your financial plan has to consider the worst case scenario of a share market crash. Hopefully, a 1987 Black Monday type of crash will not happen.

About this article

This article is of the opinion of the writer and may not be applicable to your personal circumstances, therefore, discretion is advised. You may use this article as content for your blog/website/ebook.

Check out my other articles on www.robertastewart.com