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
Top answer provided by:
This is a great question and one that comes up regularly. There are a few components to this question so I’ll break down some of the questions you should ask yourself which will assist.
What is your reason for investing?
Typically when considering investments, the first question is: what are you trying to achieve? This is such an important question, because there might be 100 different types and structures of investments but the investment itself needs to align with your goals. Even if an investment performs well, if it doesn’t align with your goals, it may not be the right investment for you.
For example, if you wanted to invest money but needed to get access to $10,000 each year to pay for school fees, an investment property probably wouldn’t suit you, because you can’t sell a bedroom every time you need access to money.
Therefore, understanding upfront what your intention for the investment is will help you to clarify the type of investment. In deciding what you are investing for, you need to consider:
- When you will need the money and how long you wish to invest for?
- How much time you personally can afford to spend on managing the investment?
- How much additional money you may wish to invest ongoing into the investment?
How will you service the loan?
The second question that is also really important is how do you intend on servicing the loan? You are borrowing money to invest in this circumstance, meaning you will at a minimum have interest repayable on a monthly basis.
Do you want the investment itself to pay for the interest repayments? Or do you have enough excess cash in your everyday spending, to cover the cost of the ongoing repayments?
It’s important to remember that borrowing to invest will always increase the risk level in your investment strategy (and potential reward level), so having capacity to pay down the loan if the investments/markets aren’t performing particularly well is a smart move.
Once you know the answers to the above questions, you can consider the types of investments that you could potentially invest in.
What are some typical investments?
Assuming that the $50,000 you want to invest is to achieve longer term wealth and you have a relatively long investment period, then you have a variety of potential options available to you. These may include
- Managed Funds
- Direct Shares
Managed funds are a common way for you to pool your money with many investors and have your investment professional managed on your behalf by an investment manager. You buy units in the fund, and your units are then pooled with others to purchase underlying investments for the overall fund. Your managed funds should be diversified and invested in shares, bonds, property and cash investments. This ensures that your money is invested among a lot of different investments, sectors and countries without having to physically research and buy the individual investments themselves.
An ETF (Exchange Traded Fund) is a type of security that is similar to a managed fund, in that you are able to access a lot of different underlying investments, but this is purchased on the ASX, like you would buy an individual share. Individual shares focus on one company, whereas an ETF usually tracks a specific asset class such as a commodity or a currency.
This can be a cost-effective way to invest smaller amounts of money and still allow you to have an appropriately diversified portfolio across different assets and sectors.
Direct shares, whilst certainly an option, will be the hardest work and provide you with the lowest amount of diversification. Buying direct shares, is the concept of investing in one company. That means in order to get a level of diversification, you would need to buy several companies directly. Whilst the amount of money you have to invest is not small, you will likely not be able to get a fully diversified portfolio of shares with $50,000 as you will be unable to individually buy shares in each sector and country.
What is the best time to invest?
You have asked about the best time to actually do this, which is a common question. The thing about the best long-term investments, is that you can’t really time the market. Nobody knows when the ‘’bottom’’ of the market is, until after the fact. The best strategy for investing long term, is to invest regularly to utilise “Dollar Cost Averaging”. This is essentially the idea of investing regular amounts across periods of time, to reduce the impact of volatility on the overall purchase. For example, you may wish to invest $5,000 per month for the next 10 months into one of the above-mentioned investment options. This way you are buying at different times of the market. The market could be going down, or up at any point in time, and that is expected, so investing over time minimises the potential of investing at the top of the market, just before a crash.
In summary, there are hundreds of options available to you in each of the options discussed above, but again, you need to really consider what you want to achieve out of this investment and if you can comfortably cover the ongoing line of credit payments if the markets fluctuates downwards. Whilst investing may seem like a bit of work upfront, if you spend the time to clarify your goals and develop a solid investment strategy, you can achieve great success over time.
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