I am in my mid 30s and I have $50K that is currently in a line of credit account, but I would like to withdraw and invest it. Where is the best place to invest this money and what would be the best time to do this given the stock market is currently performing strongly?
Lana in Nerang, Qld
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I would suggest the following to help you think this through;
- Borrowing to Invest – There is additional risk when borrowing to invest as you need to consider the loan repayments when working out affordability. If the investment value falls, the loan amount still remains meaning you could be in a negative equity position which is what happened in 2007 when many people borrowed heavily to invest without accounting for impact in the event of a market tumble.
- Cash Flow – It is important to work out the overall cash flow shortfall or surplus position for the investment so you can ensure you can fund any shortfall. This should also account for the line of credit possibly reverting to principal & interest repayments as has been the case with some lenders which could increase the shortfall considerably.
- Timing the Market – This is the goal for all investors to be able to get in when the market is low and sell when at its peak. Even active fund managers who do this professionally get this timing wrong. Assuming you are looking to invest in blue chips, it would be when the herd is running for the hills full of fear or after a market correction which occurred back in March. Markets take time to recover so as long as you buy in the bottom 20% you have purchased well however as this is not known you can dollar cost average your investment and or consider a longer timeframe which reduces the impact of mistiming the market.
- Investment Options – Finally we get to the investment options in your question. There are many investment options and products available and without knowing your financial position, I will outline 3 typical investment options as a general guide. The product you run with obviously requires further investigation to ensure it represents the required investment choices at a reasonable fee.
a) Superannuation –Investing in super is about investing in the share market for the long term. Given your age however, it may not the most suitable as you will not able access your super fund until retirement age.
b) Direct Shares – This is a low-cost investment (other than brokerage fee) strategy where you directly purchase shares. This can be either high or low risk as you can tailor the share portfolio to suit your level of risk and return. The challenge is to “pick” the right shares and understand the strategy if you engage a professional. A problem with direct share investing is the lack of sufficient diversification in sector, industry and or geographic locations.
c) Managed Funds – Very similar to direct share investing but in this case you engage a fund manager who designs the portfolio for you. Managed funds are a little easier to invest in as you can review historical performance through research reports. The fund manager is responsible for buying and selling decisions and regular re-balancing to ensure risk remains within the parameters set by the fund.
Lastly given this is a line of credit facility and possibly secured against residential property, you need to consider your plans for that property. If the property was sold or refinanced, this could impact the tax position or overall cash flow for the investment strategy.
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