Investing for retirement

When clients ask if their investment is safe with InvestSMART there are two main categories they are referring to; investment risk and the security of their investment.

Investment risk:

When you invest in anything other than a term deposit, you are taking risk. Investing is not about avoiding risk; it is about balancing risk with return and having an understanding of the risks associated with each asset class.

The InvestSMART team build investment portfolios designed around different risk profiles from conservative through to high growth. These portfolios hold the same asset classes and ETFs, but the weighting allocated to each asset class varies depending on the risk profile. The portfolios are designed to wear the bumps of the market.

Additionally, we recommend this article on how ETFs can help you manage risk.

Security of your investments:

We take the security of our investors accounts seriously and have built our service around this:

• All client's investments are CHESS sponsored. They are held on a HIN in the client's name. This means the client is the legal owner of the shares and not a beneficial owner.
• Clients are able to transfer out their holdings.
• Investors can enable two-factor authentication for account login.
• Two-factor authentication is required for all account changes.
• Bank level web security keeps client information safe and secure (that's our 256-bit SSL/TLS certificate).

What can investors do?

Investors can give their investments the best possible chance by selecting a portfolio in line with the same timeframe as their goal and risk appetite. Additionally, the best defense against volatility is time. Sit tight and allow your portfolio to recover. All investing comes with volatility and occasional uncertainty but, as the famous investor Charlie Munger says, never interrupt your compounding unnecessarily. 

Your InvestSMART account will earn dividends through the exchange traded funds (ETFs) it holds. InvestSMART uses a broad range of ETFs across multiple asset classes: 

• Australian shares,
• International shares,
• Property,
• Bonds,
• Term deposits and
• Infrastrucure assets.

All of these investments earn income and that is paid to you as a distribution. All associated franking credits are passed through to you as well.

InvestSMART is the first to cap management fees in Australia. Costs are inevitable, but at the end of the day fees compound just like returns. From Alan Kohler's Great Investment Fee Scam:

"When it comes to investment management the more you pay, the less you get, for the simple but obvious reason that the price you pay comes off what you get. 

Think about it. The “product” you buy is an investment return, and the amount you pay for assistance in achieving it reduces the return. The higher the price, the more it reduces the “product”. 

There is no other thing on earth where that applies – where the price you pay for it eats into the product itself. Imagine if the more you paid for glasses, the less you could see!"

Research shows 75% of managed funds do not beat the industry standard benchmarks over ten years. The average underperformance percentage is 1.37%. The average fee charged by these funds is 1.39%. We do not believe this is just a coincidence. 

Over the course of 30 years a 1% fee would see a reduction in your total investment return of 26%. This means you have built 26% less of a nest egg than you could have, as mentioned, fees are inevitable but you should try to minimise them as much as you can.

By capping the management fee, InvestSMART takes a negative of the industry and turns it into a positive. The difference? The gap between the InvestSMART portfolio performance compared to the peer group. More money in your portfolio means more income and more growth and a wider gap to the competitors.
 

Investors use the InvestSMART service as a complete solution for their investment strategy or as a component within a broader more complex strategy.

The two most common ways we see investors use the InvestSMART service (as either a stand alone or with other investments) is through strategies known as Core & Satellite and the Bucket Strategy.

Core & Satellite investing: This investment approach sees a core component to a portfolio and typically a smaller satellite component. In a traditional approach to the strategy the core is made up of passive index tracking investments. The core is often used to achieve the index return, be it a single asset class index such as the ASX 200 or a multi-asset class index like a balanced, growth or high growth index.

The satellite component traditionally strays from the index approach and will use active management, either through picking individual stocks, ETFs or the use of specialist fund managers (e.g. small company funds) to provide a return that differs from the index.

As the InvestSMART portfolios use index tracking ETFs combined with a capped management fee for the service, the InvestSMART portfolios are often used as a core component in a core and satellite approach. You can read more on the strategy here.

The Bucket Strategy: This strategy is where you divide your total portfolio up into three components or buckets. These buckets play distinct roles in your retirement. The first is a bucket for your day to day expenses, the second is a medium term investment feeding into the first and the third is a growth bucket to provide for your needs well into the future.

InvestSMART accounts are used for this strategy because of the low fees and the ability to hold more than one InvestSMART portfolio in your account and have the capped fee apply at your account level, not the portfolio level. You can read more on the strategy here.

Every investment held in an InvestSMART account generates income. InvestSMART does not invest in non cash producing assets. The ETFs selected by the InvestSMART Investment Committee pay quarterly dividends with the exception of the cash ETF which pays monthly.

These dividends come into your account as cash and can either be paid out to you or be used to buy more investments and maintain the balance of your portfolio. It is common for retirees with InvestSMART to use the Income Sweep feature. Every month we bundle up any dividends paid and transfer them out to your nominated bank account. As the ETFs predominantly pay quarterly distributions some months will have more income than others.

To smooth this out, it is common for investors to make use of our adhoc withdrawal feature where you can request any amount whenever you wish, or have a regular withdrawal plan turned on where you nominate a set dollar amount that is drawn from your account each month. 

Anyone over the age of 18 and is an Australian resident can open an InvestSMART account. For minors, an adult must invest as trustee for the child.

Types of accounts with InvestSMART:

• Individuals
• Joint
• Individuals as trustee for children
• Self managed super funds
• Family trusts and other trusts (e.g. charitable/discretionary)
• Companies

Can you invest your super with InvestSMART?

• Only if it is in an SMSF.

InvestSMART is a digital wealth platform and despite being digital its success lies in its human touch. Your relationship with money is deeply personal, from how we earn it to how we spend, save and invest it. And so, with the individual in mind, we designed our service. 

Support: When you need to speak to a person you can

We are a digital wealth platform that uses the "digital" aspect to enhance our human support. There is always a knowledgeable real person to help you when you need, through our content, help centre, webinars, on-site chat, dedicated client only inbox and old-fashioned phone calls. It's not by accident our support is mentioned more than anything else in our reviews.  

Fees: Your money is working for you not anyone else

It is unusual for a financial service provider to make a song and dance about its fees. But when you are the first provider to introduce a capped fee, instead of being a negative, it becomes a positive. 0.55%pa is a low management fee compared to the average and we take that a step further and cap it at $550pa. What this boils down to is more of your money generating growth and income for you.  

Returns: Your returns fund your lifestyle, make sure they're working efficiently

You'll notice the InvestSMART portfolios are all compared to peers. This means the average return of all other funds that are aligned to the same industry standard benchmark as our portfolios. Why? Because these are viable alternatives that you could invest in. We aim to outperform the average of our peers by the differential in our fees. You'll notice the gap to peers at the start is small, but if you compound that difference year after year, you will notice that gap grows significantly. We keep our costs low, keeping more in your account compounding for you.    

Independence & Trust: The best investment options for you, regardless of the ETF provider 

Our Investment Committee is 100% independent of product issuers and have built careers in markets over decades and they distill that experience into our service. Their independence sees our portfolios hold the best ETFs to meet our clients' needs, regardless of who issues the ETF. 

Security: Peace of mind that your assets are securely held 

You are the legal owner of your investments with InvestSMART. All accounts have their own HIN in the client's name. Additionally, two-factor authentication is used for any portfolio changes. 

InvestSMART aims to make building and maintaining your wealth easy. The best investing is done slowly, almost forgotten about in the background and a great way to ensure you continue to grow your wealth is to use the InvestSMART automated account settings.

Growing your wealth

• Regular contribution plan: Turn on a regular contribution plan to have a minimum of $100 per month direct debited from your bank account into your InvestSMART account.
• Automatic dividend reinvstment: The default setting for your InvestSMART account is to automatically reinvest the distributions. Instead of just going straight back into the ETF they came from, they are reinvested across your portfolio to maintain balance.

Maintaining your wealth

• Automated income settings:
  • Income sweep: Every month we scan your account to see what dividends have been paid. They are bundled up and transferred out to your bank account. Clients living off the proceeds of their portfolio make use of this setting.
  • Regular withdrawal plan: Have a preset amount withdrawn from your portfolio each month. The InvestSMART team will ensure your portfolio maintains the right balance whilst providing you with regular funds.
  • Adhoc withdrawals: Withdraw funds as and when you need to fund your lifestyle or take advantage of market highs.

We understand it will happen, but it’s unpleasant when it does. So, here’s what to do when your account balance goes the wrong way.

Volatility

The securities markets are often associated with big swings in prices. For example, when the stock market rises and falls more than one per cent over a sustained period, it is called a “volatile” market. See Nuts and Bolts: What is Volatility.

Reasons behind volatility will vary, and seeing headlines detailing consecutive down days in markets and then seeing the flow-on effect on your investment portfolio tends to induce concern.

We invest knowing down days will occur, and it’s how we react to them that will determine your long-term investment success. Here’s how you and InvestSMART help to manage volatile times and keep your investments on track: 

1. Diversification is the key to lowering volatility over time. InvestSMART rebalances your portfolio from time to time, ensuring your portfolio maintains a blend of assets in line with the mandate of each portfolio. In short, we make sure a balanced portfolio remains balanced. It gives you confidence your portfolio blend and risk is in line with your expectations.
2. Make sure your investment portfolio is in line with your investment time horizon. The length of the timeframe directly correlates to the breakdown of growth and defensive assets each portfolio invests in. The longer the timeframe, the higher the growth assets and the greater the volatility. That timeframe allows for market downturns and provides time to recover. InvestSMART makes this easy for investors by clearly indicating the recommended timeframe for each portfolio.  
3. What you can do to help. Focus on your timeframe. You know downturns happen. It’s par for the course when it comes to investing. Stick to your timeframe, continue your regular contributions and add more funds if you can.

I’d recommend this excellent piece by my colleague John Addis on How to Worry Better for further reading.

Finally, we’re here to help. Use the chat function, email or call on 1300 880 160. We cannot provide personal/specific advice, but we can talk about investing generally and account management.

The core investment philosophy at InvestSMART focuses on the principles of diversification, low fees and investing for the long term. Exchange Traded Funds (ETFs), in comparison to unlisted managed funds, provide a cost-effective method to ascertain these goals. They also have liquidity benefits, being easier to buy and sell at short notice.

ETFs provide broad diversification by only needing to purchase a small number of securities. In contrast, when buying and holding hundreds of individual securities to achieve a similar level of diversification, greater costs are incurred in brokerage and fees – imagine the brokerage to buy 200 individual stocks!  

ETFs are also great for managing risk. When you invest in an ETF, you lessen individual company risk and sector risk. By holding a basket of individual stocks, you are not limiting your exposure to individual sectors of the market. 

In using ETFs, InvestSMART has the capacity to pass on these lower costs to the investor in the form of capped fees and low-cost investing. As fees compound over time, even a slight increase in fees can result in substantial differences to your return. 

You can read more on ETFs here.