How to make successful investment decisions together

Who is right, and how do you pick a winning strategy?

So you’ve decided to pool your resources with your partner, and start building future wealth together through an investment. That’s exciting – but how do you agree on where to begin?

Here’s a fairly typical scenario: you believe in the security of bricks and mortar property, but your partner would prefer to see some short-term gains in the equity market. They’re happy to read the financial pages and monitor stocks on an app. You like the idea of regular rental income and negative gearing any short-term loss against your tax return.

Who is right, and how do you pick a winner amongst all your investment options?

Let’s start with some facts. The ASX 2014 Long-term Investing Report shows Australian shares had a return of 9.2 per cent in the 10 years to December 2013, while residential investment property returned 6.1 per cent and global shares returned 8.2 per cent. But when we look at the longer term – the 20 years prior to December 2013 – investment property returned 9.9 per cent compared with 8.7 per cent for Australian shares.

Clearly, whether you bought a house or equities over that timeframe, as long as it was a good quality asset you would be on track to building some wealth.

Set up a strategy together

Noel Yeates, Senior Wealth Adviser at Macquarie, says couples need to develop their own ‘financial business plan’. “Many couples don’t do this, but you need to sit down and agree where you want to be in five years, 10 years and beyond.”

Each decision has implications for how you’ll spend your time and money, and you will need to listen and understand your partner’s needs and concerns. “Talking about these significant things may be difficult as they rarely get discussed – but you may learn something new about each other,” Noel explains. “And you also may end up needing to compromise.”

He suggests asking each other the following questions:

• where do we want to be financially in five years?
• how much money do we want to invest?
• what is our time horizon for this investment?
• how secure is our income?
• are we comfortable taking on debt to finance our investment?
• how would we feel if the value of our investment went down 10 per cent?
• how much time do we want to spend managing our investment?

Once you know how each other feels about these questions, you’ll have a clearer picture of the type of investment that suits you both. For example, if you have a short-time horizon, liquidity is important and shares are easier to convert to cash quickly. However, if you’re comfortable keeping your investment for 10 years or more, property will yield you a long-term gain.

If you’re not comfortable taking on debt, or your income is not secure, property investment may not be for you. You’ll also need at least 20 per cent saved for a deposit (or as equity in your own home) to get onto the property ladder. However, if you would start losing sleep when the value of your investment dropped by 10 per cent, you need to look for a reasonably low risk option, or be prepared to diversify your investments to spread that risk.

Noel suggests creating a matrix that lists the following three key criteria down one side and all your options across the top, including your own home, investment property, bank shares, speculatives and so on.  

• How much money will we invest?
• Do we want debt attached?
• How liquid does it need to be? (Or, what’s the time horizon?)

“Then you can rank your investment options according to your preferences. This becomes your joint financial business plan.”

What should you outsource?

Deciding on an investment takes considerable time and energy – and if you’re busy there’s a risk you may not do enough research and rush into a bad decision.

“No matter what asset you’re buying, you must do your research first,” advises Noel. “You can do it yourself, or you can speak with a financial adviser, property buyer’s agent or real estate agent. Consult widely, you need to be empowered. The money you are investing is yours, and only you can take responsibility for the decision.”

So what should you research? If you’re buying an investment property, yield is an often overlooked but essential factor. This is what will determine the weekly return on your investment – and if the yield is too low and interest rates rise, that return could be negative. Likewise, it’s important to look at dividend certainty when buying shares. The overall value may go up or down, but this will provide some income over time.

“If you don’t understand the factors behind your investment, you need to speak with a financial adviser who does,” Noel comments. He says one of the biggest mistakes he sees is when people defer any decision making, and then rush into a last minute decision without a clear plan or research. Or the reverse – never making a decision, leaving one partner frustrated because you never get anywhere.

So before you make the final decision, think about why you are doing this. Or as Noel says, “never lose sight of the end goal”.