Want to learn how to invest? Here are three expert tricks and the rule of 72

You have reached your maximum number of saved items.

Remove items from your saved list to add more.

The last federal budget is tilting Aussies en masse out of property investing and towards the sharemarket. So, are there shortcuts when it comes to investing?

Often when you start investing – or if you started a while ago – it can be difficult to determine how you’re going. Or, indeed, where you are going. You know – OK, hope – that you’ll make good returns. And history shows that, over the long term, you can. But choosing your investments and then judging your progress can be difficult.

By simply dividing the number 72 by your rate of investment return, you will discover how many years it will take for your money to double.Simon LetchHere are some maths hacks experts recommend to do just that.

You probably already know about the magical phenomenon that is compounding returns. Albert Einstein, in fact, called it the eighth wonder of the world. It is, put simply, earning interest on interest, or investment returns on investment returns. Compounding adds past gains back into your pool of money, so the total base grows larger.

Ordinarily you need a calculator to figure out how fast compounding might work for you, except for this first, neat trick.

By simply dividing the number 72 by your rate of investment return, you will discover how many years it will take for your money to double. At a realistic rate of return over time, let’s say 8 per cent, you could double your money in nine years.

Equally, divide 72 by the number of years in which you would like to double your money to find out the investment return you will need. There’s a shortcut number for seeing what it would take to triple your money, too.

The rule of 115 works just like the rule of 72 but, yes, applies to tripling money.

If we use nice, even numbers, to do so over 10 years would therefore require an annual return of 11. 5 per cent. But you need to consider an important related point. You should not expect to make as much as 11.5 per cent in most years and if you do, or are promised you will, you are probably taking on very high risk with your invested money – or what’s called your capital.

Firstly, the May federal budget dramatically changed the tax treatment of capital gains and it unexpectedly did this not just for property but also for shares.

Because it also removed the ability to negatively gear – a time-honoured property strategy that let you offset investment losses against other income – it shifted investors’ focus, making share investments, where a big chunk of the gains are from income or dividends, more attractive.

And that makes the calculation of yield – how much income you are getting relative to your capital – important.

To calculate your current yield, divide the amount of income you get in a year by what your investment is worth today, and multiply this by 100. So if you make $200 from a $4000 investment, you are getting a yield of 5 per cent.

A yield beyond that is considered high. And note that though we are ignoring tax for the purposes of these back-of-the-envelope, quick calculations, Australian shares still carry the huge advantage of what are called franking credits for the tax that a company has already paid, which you can offset against your own income.

But you also need to know that shares carry more risk – as in, the value of your initial investment could fall to a greater degree – than investments more heavily angled towards producing income, like bonds or, of course, deposit accounts (deposits carry no risk).

So how do you split your money between the different investment types?

There is an old investment adage that goes like this: the longer you hold investments, and the higher risk you can afford to take with them, the more – theoretically – you get in returns over time. That’s premised on having time to make up losses before you have to “crystallise” or sell your shares. You also need to consider your own particular needs, like how soon you might need the money and how comfortable you would feel if your investment dipped in value for a time.

But the straightforward rule of 120 says that to determine your ideal “asset allocation” you should subtract your current age from 120.

The result is the maximum percentage of your portfolio that you should expose to growth assets like shares, while the remainder should be invested in safer fixed-income vehicles (like bonds or cash deposits).

Therefore, if you are 25 you might invest 95 per cent in shares. Under this theory, that amount would gradually fall over time. But, as I said, you need to consider factors other than your age.

Ultimately, all investment is risky to some degree and, right now, markets are wobbly. A final concept called “dollar cost averaging” can also help with your investing.

Rather than investing a chunk of cash all at once, risking doing so right before a price dip, here, you drip-feed money into the market slowly, carefully and regularly.

Micro investment apps like Raiz and Sharesies help you do this with very small amounts. This approach, firstly, makes investment affordable, and secondly, as I always say, micro-investing makes a maximum difference. You hardly miss the money using this approach!

As a bonus, regularly investing a fixed amount lowers your average share/unit purchase price and also gives your portfolio a bigger boost when markets pick up.

Think about it: the cheaper the prevailing price, the more shares/units you buy and, therefore, the more you have to grow.

Nicole Pedersen-McKinnon is author of How to Get Mortgage-Free Like Me, available at nicolessmartmoney.com. Follow her on Facebook, X and Instagram.

Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.

You have reached your maximum number of saved items.

Remove items from your saved list to add more.