Investment Decisions That Stand the Test of Time

The hardest part of investing is not necessarily finding something that performs well this year. It is making decisions that continue to make sense when circumstances change.

Markets move. Interest rates change. Property values rise and fall. Businesses experience strong periods and difficult ones. Your income can increase, your expenses can change, your family can grow and your priorities can evolve.

An investment decision that stands the test of time is therefore not necessarily the one that produces the highest return in one particular period.

It is a decision built around a clear objective, an appropriate level of risk, a suitable time frame, manageable cash flow and enough flexibility to adapt when circumstances change.

For Australians, this can involve several parts of the financial picture, including residential property, shares, ETFs, superannuation, cash and debt.

What Makes an Investment Decision Durable?

A long-term investment decision usually starts with a more fundamental question:

That question is more useful than starting with a particular investment.

Moneysmart recommends developing an investing plan around financial goals, time frame and risk tolerance, while also reviewing your current assets, debts, income and expenses. It suggests that your investment choices should fit the period over which you need the money and the amount of risk you can tolerate.

For example, money you may need in the near future has a very different job from money being invested for retirement decades away.

The same applies to property. Buying an investment property, paying down a home loan or using equity to fund another investment can all have different purposes and different implications for your overall finances.

A decision becomes more durable when its purpose is clear.

Start With the Goal, Not the Investment

It is easy to become interested in an investment because of what it has recently done.

Perhaps property values have been rising. Perhaps a particular share market has performed strongly. Perhaps a certain investment fund has attracted attention. Perhaps interest rates have made cash and term deposits more appealing.

But an investment should serve your financial plan rather than become the plan itself. Suppose you are investing to build a retirement portfolio over 20 years. The relevant questions include:

• How much do you need?
• How much time do you have?
• How much volatility can you tolerate?
• How much money can you invest regularly?
• What other assets and debts do you already have?
• What happens if your circumstances change?

These questions can lead to a very different decision from simply asking which investment has performed best recently. Moneysmart's current guidance encourages investors to define their goals, identify the amount required and establish the time available to reach each goal.

Time Horizon Changes the Decision

An investment decision that works over 20 years may not be appropriate for money you need in two years.

Time gives an investor more opportunity to experience different market conditions, but it does not remove investment risk. Moneysmart notes that longer-term goals may allow investors to consider higher-returning assets such as shares and property, which also carry greater risk and can fall in value in the short term.

This makes the time horizon particularly important. Imagine two people with $100,000 to invest.

• One expects to use the money for a home purchase in two years.
• The other is building retirement wealth over 25 years.

They have the same amount of capital. Their investment decisions may reasonably be very different because their money has different jobs and different time constraints. A durable investment strategy recognises this from the beginning.

Understand Risk Before Chasing Return

Higher potential returns generally come with higher levels of investment risk. That does not mean investors should avoid growth assets. It means the potential downside needs to be understood before an investment is made.

Consider an investment that falls significantly in value. If you have a long time horizon, sufficient cash reserves and a diversified portfolio, you may have more capacity to remain invested. If you need the money immediately, the same fall could have much greater consequences.

Risk also extends beyond market price movements. It can include:

• liquidity risk
• interest rate risk
• concentration risk
• credit risk
• vacancy risk
• leverage risk
• tax consequences
• changes in personal circumstances

Moneysmart advises investors to understand the risks and returns associated with different asset classes and make sure those investments fit their goals and time frame.

The important question is therefore not simply: "What could I make?"
It is also: "What could go wrong, and could I continue with the strategy if it did?"

Diversification Can Help a Strategy Survive Different Conditions

One investment does not have to perform well all the time for a diversified portfolio to have a purpose.

Diversification involves spreading investments across different asset classes, sectors, geographic regions and individual investments. Moneysmart explains that diversification can reduce the impact of some investments performing poorly by spreading exposure across areas that may behave differently.

For an Australian investor, a broader portfolio may include exposure to areas such as:

Diversification does not guarantee a profit or eliminate losses. It is about reducing reliance on one investment, one market or one source of return.

Owning Several Properties Is Not the Same as Being Diversified

This is particularly relevant for property investors. Owning one property is clearly a concentrated investment. Owning five properties may look more diversified because there are five individual assets, but the overall portfolio can still be heavily concentrated in residential property.

Those properties can be exposed to similar factors, including Australian property conditions, interest rates, lending conditions, vacancy and property-related costs.

Moneysmart specifically warns investors about putting too much of their money into property and encourages diversification across other investments.

That does not mean every property investor needs the same asset allocation. A property-heavy strategy may be deliberate. The important point is to understand the concentration. Look at your whole balance sheet, not just the number of properties you own.

Property Can Be an Important Investment, But It Has a Different Risk Profile

Residential property is familiar to many Australian investors, and it can form a significant part of a long-term wealth strategy. However, direct property also has characteristics that make it different from listed investments.

A property can provide rental income and potential capital growth, but it can also involve:

• mortgage interest
• maintenance
• insurance
• rates
• management costs
• vacancy
• buying and selling costs
• periods of falling property values

Unlike listed investments, property is also less liquid. You generally cannot sell a small portion of a house to raise a relatively small amount of cash. Moneysmart identifies this lack of flexibility, along with high entry and exit costs and vacancy and interest rate risks, as important considerations for property investors.

That makes cash flow an important part of property investing. An investment decision may look attractive based on expected capital growth, but the household still needs to be able to support the property if rental income changes or costs increase.

Leverage Can Accelerate Outcomes in Both Directions

Borrowing to invest can increase the size of an investment position. It can also increase the size of losses.

Moneysmart describes borrowing to invest as a high-risk strategy and notes that leverage can produce larger gains when markets rise but larger losses when markets fall. Borrowers remain responsible for the loan and interest even when the underlying investment declines in value.

This is especially important for property investors. Using home equity to help fund another property can potentially accelerate portfolio growth, but it also increases debt and repayment obligations. The durability of the strategy depends partly on whether the investor can continue to service that debt through different conditions.

That means looking beyond: "How much can I borrow?" and considering: "How much debt can I comfortably carry through a range of circumstances?"

This is one reason investment decisions should be connected to household cash flow rather than viewed purely as asset purchases.

Cash Flow Can Matter as Much as Capital Growth

Long-term investing is often associated with capital growth. But cash flow can determine whether you can actually hold an investment long enough to realise that potential.

This is especially relevant to leveraged property. Imagine an investment property that requires additional money from your household every month after rent and expenses. That may be manageable when income is strong and expenses are predictable.

But what happens if:

• one income temporarily falls
• mortgage rates increase
• the property becomes vacant
• a major repair is required
• childcare costs rise
• another financial commitment appears

Moneysmart highlights rental vacancy, interest rates and ongoing property costs as risks investors need to consider before purchasing investment property. A long-term strategy therefore needs enough cash-flow resilience to survive periods that are less favourable than expected.

Do Not Build the Strategy Around Perfect Conditions

One of the most fragile investment approaches is one that assumes everything will go according to plan.

None of these outcomes is guaranteed. A more durable strategy considers what happens when assumptions are wrong.

• What if growth is slower?
• What if the investment sits vacant?
• What if you need to access cash earlier than expected?
• What if your expenses increase?
• What if your employment changes?

Thinking about these scenarios does not require predicting the future. It simply helps determine whether the strategy has enough margin to cope with uncertainty.

Avoid Chasing Yesterday's Winners

Investment performance can be highly visible. That visibility can create pressure to move money into whatever has recently attracted attention. But past performance does not automatically tell you what will happen next.

A long-term strategy can become less effective when decisions are repeatedly changed based on recent returns rather than long-term objectives. A more useful approach is to ask:

• Has my financial objective changed?
• Has my time horizon changed?
• Has my risk position changed?
• Has the investment itself changed?
• Has my overall portfolio become too concentrated?

Moneysmart recommends reviewing investments against your original goals and checking whether the investment still fits your time frame and risk level. That is different from reacting to every market movement.

Your Investment Strategy Should Change When Your Life Changes

Long-term investing does not mean making one decision and never changing it. Your circumstances can change significantly. You may:

• get married
• have children
• change jobs
• receive an inheritance
• buy a home
• start a business
• retire
• take on additional debt

Moneysmart specifically suggests reviewing investments when circumstances change, including events such as changing jobs, having a child, buying a home or retiring.

This is important because your risk capacity and investment goals can change even when the investments themselves have not. For example, an investor with a long time horizon and stable income may have more flexibility than someone who suddenly needs access to capital within a few years. The strategy should evolve with the underlying financial situation.

Look at the Whole Balance Sheet

One of the most useful ways to think about long-term investing is to stop viewing investments individually. Instead, look at the entire financial position.

Then consider how those assets and liabilities interact. Moneysmart recommends reviewing what you own, what you owe, your income and expenses before investing. It also recommends considering diversification as part of the overall investment plan.

This broader view can reveal things that are difficult to see when looking at one investment at a time. You may discover that most of your wealth is tied up in one asset class. You may have substantial equity but limited liquid savings. You may have a large mortgage but a diversified investment portfolio. Or you may have significant investments while carrying expensive debt. The investment decision should make sense within that bigger picture.

Mortgage Structure Is Part of the Investment Equation

For property investors, the relationship between investment assets and debt is particularly important. The mortgage is not separate from the investment strategy.

Its interest rate, repayment structure, loan term, available features and organisation of debt can all influence household cash flow. This is why a property strategy should not focus only on which property to buy. It should also consider how the property will be financed and what that financing may mean for future options.

For example, a homeowner planning to purchase an investment property may need to think about:

• current borrowing capacity
• existing debt
• property equity
• usable equity
• cash reserves
• loan structure
• future borrowing requirements
• expected holding costs

The objective is not necessarily to maximise borrowing. It is to ensure the debt is consistent with the broader strategy.

Keep Good Investment Decisions Simple Enough to Explain

A strategy that requires constant explanation can sometimes be difficult to manage. Before making an investment, you should be able to explain:

Moneysmart advises investors to understand what they are investing in, including its risks and benefits, before committing money. Understanding does not mean certainty. It means being able to explain the role of the investment and the trade-offs you are accepting.

Tax Should Be Considered, But Not Allowed to Drive the Entire Strategy

Tax can have a significant impact on investment outcomes. For property investors, this can include the tax treatment of rental income and expenses.

Moneysmart notes that negative gearing can result in an investment loss where investment income is lower than interest and other expenses, and that the investor still needs to fund that cash shortfall from other sources.

That is why an investment should not be justified simply because of a potential tax deduction. A tax benefit does not turn a poor cash-flow position into a positive one. Tax should form part of the analysis, alongside investment purpose, risk, cash flow, debt and long-term objectives. For personal taxation questions, investors should obtain advice relevant to their own circumstances.

What About Superannuation?

For many Australians, superannuation will form one of the largest components of long-term wealth. This makes it important to consider super alongside property and other investments rather than thinking about it as an entirely separate financial world.

Super funds generally invest across a range of assets depending on the investment option, and members can often choose between options with different mixes of growth and defensive assets. The appropriate mix can depend on factors such as time horizon, risk tolerance and retirement objectives.

This reinforces a broader principle: Your investment strategy is bigger than the next investment you buy. Your home, investment properties, super, shares, cash and debt all form part of the same financial picture.

Long-Term Does Not Mean Passive

Standing the test of time does not mean ignoring your investments for decades. Markets change. Your portfolio can become more concentrated. Your circumstances can change. Your original objective may no longer apply.

Moneysmart recommends reviewing investments regularly and checking whether they remain aligned with your goals, time frame and risk capacity. It also notes that portfolio allocations can drift as different investments perform differently over time, which can create a need to rebalance.

The difference is between reviewing deliberately and reacting emotionally. A long-term investor can make changes when the underlying strategy needs to change without constantly changing direction because of short-term market movements.

Three Questions Before Making a Major Investment Decision

Before committing significant capital, step back and ask three questions.

How Pinpoint Finance Fits Into the Broader Strategy

For homeowners and property investors, the investment conversation often intersects with the mortgage. A property purchase, refinance or equity release decision can affect cash flow, debt levels and future borrowing capacity.

That is why it can be useful to assess the financing side of an investment strategy alongside the property itself.

At Pinpoint Finance, the focus can include your existing mortgage, equity position, debt structure, borrowing capacity and what you may want to do next. For example, someone considering an investment property may need to understand not only whether they can purchase the property, but how the additional debt could affect future flexibility.

Someone with substantial equity may need to consider whether accessing it supports a clearly defined investment objective or simply increases leverage. And someone building a property portfolio may eventually need to consider how each new purchase affects the structure of the overall debt.

Pinpoint Finance has access to more than 60 lenders, allowing different lender policies and loan structures to be considered when assessing the financing side of a property strategy. The investment selection itself may require advice from an appropriately qualified financial adviser, particularly when considering broader asset allocation, securities or complex investment products.

The Property Piece of a Long-Term Investment Strategy

Property can play an important role in an investment strategy, but it does not have to be the entire strategy. For someone with a strong property focus, long-term thinking can mean paying attention to:

• purchase price and property fundamentals
• borrowing levels
• cash flow
• vacancy risk
• debt structure
• equity
• future borrowing capacity
• concentration
• exit considerations
• personal circumstances

For someone already holding substantial residential property, the next investment decision may involve asking whether adding another property actually improves the overall position. Sometimes the answer may be yes. Sometimes another asset class may address a different objective. The important part is understanding the role the investment is expected to play.

Investment Decisions Should Survive Different Life Stages

The investment strategy you use in your 30s may not look identical to the strategy you use approaching retirement. That is not necessarily a problem. Your priorities can change.

Early in your career, your focus may be accumulating assets. Later, you may care more about reducing debt, protecting income, generating sustainable income or improving liquidity. Family responsibilities can also alter how much financial risk is comfortable to take.

This is why a long-term strategy needs direction without being rigid. The goal is not to create an investment plan that never changes. It is to create one that can change for the right reasons.

What Investment Decisions That Stand the Test of Time Have in Common

There is no single investment that will perform best through every period. There is also no universal portfolio that fits every Australian household. But durable investment decisions tend to share some characteristics.

• They start with a clear objective.
• They recognise the investor's time horizon.
• They account for risk.
• They avoid unnecessary concentration.
• They consider cash flow and liquidity.
• They understand the impact of leverage.
• They look at the whole balance sheet.
• And they are reviewed when circumstances change.

Most importantly, they are not built entirely around what happened last year. They are built around what the investor needs over the years ahead.