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Secrets To Wealth
Watching out for tax, inflation and fees
The next secret to wealth: watching out for the long-term effects of tax, inflation and fees.
Successful savings and investment programmes are long-term. This has some significant advantages, such as allowing you to benefit from the magic of compounding growth and to ride out the highs and lows of share market volatility.
However, it does enable the dangers of tax, inflation and fees to have a substantial effect on the eventual return of your investment.
Take the simple example of a retirement nest egg worth $100,000, invested for 20 years. If you were able to increase your investment return from 3% to 4% through somehow reducing the effect of the three dangers, your investment could be worth an extra $40,000 (enter your own numbers into the lump sum savings calculator).
TaxIt is worthwhile being aware of investments that are tax "happy". Examples of these include the capital gains made on residential property investment and passive unit share trusts. Both of these examples operate under the premise that because you (or the trust) are not trading, then income tax is not deemed to be applicable.
InflationHopefully, we won't be visited again by the inflation dragon of the 70s and early 80s. It's important to be aware of the huge damage that inflation did to investment portfolios during this period. It's important because you need to know that if the inflation conditions materially change for the worse, you should review your investments accordingly.
For example, while interest income may sky rocket, inflation will end up slowly destroying the capital value of fixed interest investments. Conversely, while the interest costs may substantially increase, the value of property will also increase, thereby not only protecting your capital base, but probably also increasing it.
But even in today's environment, low inflation will have an impact over the longer term. It is wise, therefore, to ensure that you have a well-balanced portfolio that includes property and shares.
FeesFees, particularly through managed fund investments, can be substantial over the long term. This does not mean that you shouldn't invest in managed funds. Rather, it means that you should be fully aware of the full extent and nature of those fees and try to understand and assess the value of those fees.
For example, paying fees to a specialist fund manager isn't necessarily a bad thing. But you should be comfortable that the manager is delivering better returns than could be achieved through a similar investment with lower fees.