Make smart choices with your deployment allowance
If you're a regular reader of the lifestyle section of your service newspaper you'd be used to reading my predecessor Tony D'Aloisio's articles on money management and investing. Tony's term as Chairman ended in May and this is my first article for the service newspapers as ASIC Chairman.
I'm really looking forward to continuing ASIC's work with the ADF Financial Services Consumer Council. Please feel free to suggest article topics to me by emailing ADFcolumn@asic.gov.au. I want these articles to continue to be practical and relevant to your needs.
Every Australian's financial situation is unique. There are some specific issues that you face, as ADF members. One such issue is your deployment allowance.
If you've been deployed overseas and have returned home you're likely to get a large tax-free payment. For example, a paratrooper deployed in Operation Slipper in Afghanistan can get an extra $200 per day on top of other benefits and standard pay.
This tax-free money is a great reward for a difficult job. But be careful how you manage the money you get when you're deployed. We've heard stories about ADF members who have blown all their money. Some members have experienced large gambling loses. Others have purchased expensive items online, such as cars, without seeing them first. There is also the problem of members being coerced into buying fake jewelry from local vendors. Always think twice before making a large purchase.
You should also be careful with your money when you return from overseas. You could come back from overseas with more than $30,000 in your bank account. It's only natural that you will want to spend some of that money on a little R&R with your family and friends. However there are dangers associated with having this kind of money on hand.
To make the most of your deployment allowance consider taking a large portion of it and investing it in things that will help you grow your wealth over time – that way you will see the benefits now and in the years to come, rather than just getting some instant gratification.
The first thing you should do is have a look at your debts. If you have a credit card debt, large or small, or a personal loan, pay it off as soon as you can. Reducing your debts is one of the best things you can do because, simply, the sooner you pay it off, the more money you will have, as you won't be giving away 'dead' money in interest payments.
When it comes to spoiling yourself for a job well done, try to avoid buying expensive items like new cars, motorbikes and jet skis. These things depreciate in value very quickly. If you need to make a large purchase, shop around for the best deal and always read the fine print. But think seriously about making your money work for you instead.
If you’re debt free it's a great idea to put money aside and start investing or saving for a deposit on a home. Investing in a range of shares and managed funds across a few different industries is a great way to start a diversified investment portfolio that can ride the ups and downs of the financial markets.
Investing successfully has very little to do with good luck. There are tried and tested principles you can follow. A smart investor takes time to understand the basic principles of investing, then develops, and sticks to, a sound investment plan.
The first stage on your journey to investing wisely involves doing some reconnaissance. Having goals and knowing your risk tolerance helps determine your choice of investment. It's also very important to assess the trade off between risk and return for every investment decision you make. In this way there are parallels with planning to invest and planning military operations – you want to make informed decisions about risk.
Once you’ve identified your goals and risk tolerance, develop an investment plan that meets your needs and spreads your assets. You can avoid disasters by checking out our list of investment warnings at www.moneysmart.gov.au. Be wary of claims made in seminars about sports betting and trading software or 'get rich quick' offers. There is no substitute for hard work and if it sounds too good to be true, it probably is.
Once you've got your investments set up you need to keep your investment strategy on track by monitoring your progress. Don't just set and forget. Unfortunately, there are no short-cuts to becoming a successful investor.
For more information on investing, managing your money, avoiding scams and clearing your debt visit www.moneysmart.gov.au.
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Australian Securities and Investments Commission
Mind vs Emotion
The Global Financial Crisis helps us all see that emotion can overrule logic when it comes to investment decisions.
Constant and emotive coverage about falling share prices and declining asset values helped to create panic among investors to cause them to sell up and invest in cash.
The first problems is that an investor may have sold when prices were low.
Cash doesn’t suffer from the same ups and downs as shares and other investments. However by moving into cash and staying there an investor will not be in market when confidence and prices recover. This is the second problem – to get back into the market, you have to spend more than you would ideally like.
So rather than sell high and buy low, investors are often doing the exact opposite.
The selling when markets are falling is often driven by fear and to be with the larger crowd.
When markets rise, Alan Greenspan’s “irrational exuberance” phrase can often be very apt because a rising market can often feed on itself.
“Irrational pessimisim” might be an appropriate term when a downward market begins to feed on itself.
We all have mental pitfalls and can be our own worst enemies. One of those pitfalls is attempting to time our entry and exit into financial markets perfectly.
In reality very few succeed. An annual study of the S&P 500 over the last 20 years compared to investors actual returns shows that the market averaged 8% but investors managed just 1.9% by buying and selling at the worst possible times.
It takes courages to go against the investing crowd and media reporting. To withstand the emotional onslaught we need to set our investment goals and put in place a portfolio that will work through times of increased market volatility.
Diversification of your portfolio, covering a range of markets, products and sectors is also important because it will help keep your portfolio and possibly emotions in balance
Ways to avoid suing too much emotion in your decision making:
- Question your decisions
- Keep informed – but remember to sort fact from sensationalist media reporting
- Maintain a well-diversified portfolio
- Seek advice – but make sure you fully understand what is motivating the financial adviser providing the advice. Watch our video on financial advisers are our website (www.adfconsumer.gov.au)
Free Seminars anywhere in Australia
The ADF Consumer Council provides financial education at Initial Training, Force Preparation, Post Deployment, Leadership Training, During Career and Transition, many of which are components of ADF training programs. The Consumer Council is happy to provide expert speakers free of charge on a range of financial topics to any ADF unit in Australia.
For more information contact us via our website (www.adfconsumer.gov.au).