It is best to make investment decisions when we have a clear picture of our goals. Our goals will determine why we are investing in the first place.
Are we saving for a deposit on a house, are we building a nest-egg for retirement, are we aiming to preserve the real value of our capital over our retirement, do we want to maximise our retirement income. There can be many goals and they will vary for each one of us.
Clearly articulated goals will give us focus to help make our investment decisions. Goals are best to be created and maintained as part of a documented financial plan.
Long term investing in good quality growth assets is the best way to passively build wealth and then preserve that wealth.
By long term we would generally mean 5 to 7 years plus. For most of us, we should be long term investors as our investment time frame is the rest of our life. To prove that long term investing in good quality growth assets is the best way to passively build wealth we have supplied research on Australian Share market returns over the past 100 years which shows that on average – 8 out of every 10 years has been a positive growth year – see page 7 & 8 our investment belief document.
The Andex chart below (click to enlarge) also shows the historical performance of markets and what is interesting to see, is that although there are short periods where a V shape can be seen as markets correct, the long term trend is always up – with some short term interruptions.
By building wealth passively, we simply mean by just buying and holding good quality assets as opposed to operating or improving assets which we would call active investing.
An example of active investments is renovating a property or buying a business that you are actively involved in. Active assets have the ability to produce much higher returns than passive assets, but come with much higher risk, including the risk of losing all your money.
They will not be suitable for many or most people!