6 strategies to help pay for private school education

By Sarah Megginson

Would you prefer to send your child to private school or purchase your own home?

For some Australians, this is a genuine either/or proposition, with new research* revealing that the total cost of a private education for one child in Sydney could be as high as $540,000.

For those living in other states and territories, the situation isn’t quite as dire. Melburnians can expect to pay up to $502,000 in private education costs over a child’s lifetime, while in Queensland it’s a relatively mild $360,000.

These may seem like outrageously inflated figures, but when you review the annual tuition at some of the country’s top schools, it’s clear that they’re accurate At Sydney’s Cranbrook School, for instance, 2015 fees are up to $33,000 per year – for tuition alone. Factor in textbooks, uniforms, excursions and other expenses, and this could quickly chew through $40,000 annually; multiply this across 12 school years (plus pre-school), and a half-million dollar price tag makes sense.

“Private school fees can be more expensive than the top MBA in the world, after a five-year degree in a top Australian university”

So what’s a parent to do if private schooling is on the agenda – but living off baked beans and two-minute noodles is not?

First and foremost, you need to decide how much you’re willing to spend, says Lacey Filipich, co-founder of Money School. Half a million dollars per private school education “seems extortionate for a typical private education”, she says, and while some schools demand these fees, others are more affordable.

“I would advise parents to think twice about committing this kind of cash. This is more expensive than the top MBA in the world, after a five-year degree in a top Australian university,” Filipich points out.

“The traditional purpose of a private high school education has been to get the best possible entry score to university, but this is declining in importance in our entrepreneurial world.”

If you’re sold on your child graduating from an exclusive private school but your financial position doesn’t match your goals, she suggests that you consider prioritising high school only.

“Recognising that some people like to send their children to private primary schools to take advantage of the ‘feeder’ systems, it's probably more important to target a higher standard of high school if funds are limited and you can't afford both,” Filipich says.

That said, if you’re committed to funding a private education for your children from pre-school onwards, you’ll need to prepare as early as possible.

The following strategies may help you to start saving effectively for your kids' educational needs:

1. Start saving smartly

At the premium end of the private school market, you’ll require around $500,000 to cover one child’s private schooling costs.

“Saving this amount means putting aside $25,000 after tax a year for 20 years, discounting any benefit from interest earned or growth from investment,” Filipich says. “It's simply not enough to start when school starts; you need to get ahead of the game. So start now – even if your child isn't born yet!

“The compound effect means you may only have to set aside half the amount or less if you can get reliable growth.”

Make sure you “[G]et as much bang for your buck as you can,” she adds. “At a minimum, use term deposits to earn interest and grow your education stockpile. If you are willing to take some risk, learn and apply an investment strategy,” she says. “The compound effect means you may only have to set aside half the amount or less if you can get reliable growth.”

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2. Leverage your mortgage

For home-owners, a standard savings plan is rarely the most tax-effective strategy, says certified financial adviser Peter Horsfield, founder of SMART Advice. Instead, leveraging your mortgage could be a much more profitable way to go.

“When you park your savings in your mortgage offset account, you’re not going to get taxed on the interest,” Horsfield explains.

“Yes, the loan will eventually go back up when you draw those funds out to pay for education costs, but in the interim, less interest payments equals more money that you can use to reduce your overall debt.”

For instance, a $600,000 loan at 5 per cent would cost $30,000 annually in interest. With $100,000 in an offset account, you could save $5,000 in interest (untaxed profits), an amount that could be used to reduce your principal to $595,000.

“This is one of the most suitable strategies for parents, particularly now that deducting school fees is no longer a fringe benefit deductible employer expense,” Horsfield says. “It’s a simple way that people can accelerate their debt repayment, and know that they can access that money again for expenses such as private education.”

3. Buy an investment property

You need an investment timeline of “at least 10 years” for this strategy to work, says Chris Magnus, partner and financial advisor at Ark Total Wealth in Sydney. Anything less, and your property may not grow in value sufficiently for you to tap into equity for educational funding.

“You need to find a property in a high-demand rental area, and you want to stay away from areas that are going to be volatile, like resource towns that go through big booms and crashes,” he says. “Invest relatively conservatively into areas with a high level of transport, infrastructure, hospital and schools, and that will go a long way to decreasing your risk.”

In 10 to 15 years’ time, when you need to draw down on the loan to pay for school fees, you can then borrow against the property’s equity to fund your children’s education.

“Note that the education portion of the debt won’t be tax deductible,” Magnus adds. “If you decide to sell the property, you’ve got the potential of capital gains tax ­– and you’re selling an asset that may continue to grow further.”

4. Apply for an academic scholarship

If your child truly shows an aptitude beyond their years, you may be able funnel their educational success into financial savings.

“Many schools offer academic scholarships for potential students of limited financial means,” Filipich says. “It means doing some tests and maybe an interview in the year preceding high school, but if you've got a bright child it's worth a shot!”

5. Park your funds in a share portfolio

An investment in a share portfolio could be a smart and financially savvy strategy to save for your child’s education.

“If you’re thinking about investing for your children’s education, you’re going to be investing for the longer term…”

“Historically, investing in the share market has returned the highest returns overall when compared to other asset classes,” explains Rodney Greenhalgh, head of investment product solutions at BT Financial Group.

However the downside to the share market is that it can have volatility, as happened during the Global Financial Crisis.

“For this reason, share investments are more suitable for those with a 10-year timeframe, with five years being the minimum period you should be aiming for,” Greenhalgh says.

“If you’re thinking about investing for your children’s education, you’re going to be investing for the longer term and a 5 to 10 year time horizon allows time for the share market to peak and then recover from any troughs along the way,” he says.

“Also, the earlier you start to invest a certain amount in shares every month, the sooner you start to compound those returns.”

6. Invest in a scholarship fund

If you want a ‘set and forget’ investment plan that manages your education savings strategy on your behalf, then a scholarship fund may appeal.

Magnus adds, “There’s a certain level of discipline built into this, in terms of managing payments and doing administration on your behalf, but these funds generally tend to be quite conservative.

“Scholarship funds also tend to be quite structured and rigid in terms of how the payout is structured. Generally, other strategies tend to be a lot more flexible to your individual circumstances.”

* Australian Scholarships Group Planning for Education Index, January 2015

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Developing a taste for blue chips

By Zilla Erfrat

There’s never a better time to start investing than right now. But where should you start and how?

Just like any voyage, there’s no point embarking on an investment journey without knowing your destination, how long it will take and the risks of travel.

Your first step is to understand why you are investing. Is it for additional income, a deposit on a home, a child's education, protection against inflation or for retirement?

Your timeframe for investing will also influence your investment choices. For example, if you will need the money in two years’ time, it’s wise to avoid more volatile investments. What happens if the stock market is in a slump at the time you need the money? The longer the time you have to invest, the more you can weather the share market’s ups and downs.

Also important is your risk appetite and tolerance. Investing can be risky and, at times, you could lose money. Most often, investments that offer higher potential returns also have higher risks. Before making any commitments, it’s best to assess how much you could afford to lose if markets dipped and how comfortable you are with risk. Will choppy investment markets keep you up at night?

Now decide whether you want to travel alone or on a group tour – that is, invest directly yourself or outsource to an expert manager.

The pros of using a fund manager are many and include:

Time saving

A manager will take over the research and administration of your fund on an ongoing basis.

“If you oversee your portfolio yourself, you can’t expect to get the best outcome by buying some stocks and then forgetting about them,” says Steve Mickenbecker, group executive of financial services at ratings group Canstar. “You need to put time into researching and managing your portfolio.”

Passion

Mano Mohankumar, investment research manager at Chant West, says a manager is far more likely to yield better results if you don’t have a passion or genuine interest in investments.

Expertise, experience and resources

Fund managers hire experienced and knowledgeable experts who invest and research markets on a daily basis. Can you match their expertise?

Access

“Because fund managers pool the investment money, you have the buying power of millions of dollars.”

Managed investments allow you to access a broad range of assets or markets with a relatively small amount of cash, and to invest in assets you couldn’t afford on your own – such as shopping centres or airports.

“Because fund managers pool the investment money, you have the buying power of millions of dollars,” says Mohankumar.

Diversification

By buying into managed investments, you get exposure to an array of investments at low costs. You don’t put all your eggs in one basket, which helps you reduce risk and smooth out any short-term ups and downs in returns. Different investments will perform differently at different times – no one type will consistently outperform the others.

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Rational decision-making

“Professionals don’t feel the same hurt or get attached to stocks, so they will make more rational and balanced investment decisions.”

“Fund managers have the discipline to keep reviewing a portfolio and to make decisions that amateurs have trouble with,” says Canstar’s Mickenbecker. “Amateurs can’t help but feel the emotional side of it. Professionals don’t feel the same hurt or get attached to stocks, so they will make more rational and balanced investment decisions.

“That also applies to buying back into a market. If you’ve been hurt by falling stock prices, it’s sometimes hard to jump back on the horse. But professionals will be back on that horse as soon as they need to be.”

Reporting

Regular reports from your manager will help you keep in touch with your portfolio and complete your tax returns far easier than if you owned 20 or 50 different stocks without assistance.

Other considerations must also be borne in mind when choosing a fund manager.

The first is cost. “You are paying for a service,” says Mickenbecker. “Sometimes you may pay fees to a manager or adviser and find you are not getting the return you may have got if you bought the stocks yourself. You have to consider whether the extra performance you get from a manager is actually worth the extra amount you pay.”

The costs of a fund manager can vary widely and it pays to do your due diligence on fees and charges. But make sure you are not comparing apples with oranges. You may be charged higher fees for certain types of investments – for example, exchange traded funds (ETFs) often have lower fees than traditional managed funds.

Another thing to consider is that with some fund managers, you have no control over any investment decisions. With others, however, you may be given a great deal of flexibility to mix or add to your investment options.

In addition, some managers do not have alternative investment options available for when your circumstance or lifestyle changes. As a result, you could languish in a fund that no longer suits your needs.

If you decide to outsource, you need to be careful about how you choose your manager.

“Picking a manager can be quite tricky,” says Mickenbecker. “You can be confronted by these long lists with hundreds of funds available. It can get quite confusing.”

There are a wide range of managers in Australia. And they all use different investment styles, offer diverse products and boast varied levels of success.

Before stepping on board with any of these, Rodney Greenhalgh, head of investment product solutions at BT Financial Group, suggests you evaluate the following:

  • Track record: Has this manager performed consistently well over time and crucially, has the fund also performed well? Remember that past performance is no guarantee of future performance. Just because a fund performed well last year is no guarantee that it will do just as well this year.

  • The brand: Is it known and trusted locally?

  • Investment options: Does the manager have sufficient choices for you? Will it also meet your needs later when your lifestyle changes?

  • Philosophy: Does this align with yours? For example, if you're looking for consistent strong returns you should avoid hedge funds that pursue high risk strategies – these may produce highly variable returns from one year to the next.

  • Diversification opportunities: These are necessary to ensure your portfolio performs well during different economic cycles, and provides more consistent returns over the medium- to long-term.

  • Tax effects: An investment manager who buys and sells frequently, or has a ‘high turnover’ in its portfolio, can incur a large tax liability each year, as opposed to one that selects securities in relation to how they will perform over the medium- to long-term.

  • Your control: Does the manager allow you control of your investments? Is it transparent? Can you view your investments anytime, anywhere? Can you respond quickly and easily to change?

“Never ignore past performance because some funds underperform systemically,” advises Mickenbecker. “You probably should also not use only the past three years or five years of performance to make a decision. Sometimes a very strong performance in one year can actually make the three- and five-year performance look attractive as well.

“Getting some advice can be worthwhile. It can provide some discipline and professionalism, but advice does not come cheaply. If do get an adviser, ensure you control things. You don’t have to meet every year. Just be vigilant about your costs.”

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Turning dreams into bricks and mortar

By Zilla Erfrat

House prices look set to continue rising around Australia – even in overheated markets like Sydney and Melbourne. If you are yet to achieve the Aussie dream of owning your own home, this may come as bad news.

But there’s good news as well. You can own your own home if you start saving for a deposit now. And you may not have to change your lifestyle too much, provided you are disciplined and stick to a good savings plan.

The sooner you start saving the better – thanks to compound interest. Described by Albert Einstein as "the greatest mathematical discovery of all time", compounding, or the process of generating further earnings on an asset's reinvested earnings, can really add up over time.

Manage your spending

To save more, you need to spend less. To do this, you first need to better understand your spending, and what expenses you could cut down on. You should also work out a realistic budget and how to stick to it.

Jeff Thurecht, director at Evalesco Financial Services, also advises getting any debts under control by paying down your more expensive debt, like that on your credit cards, first.

Debt can easily spiral out of control and eat into any savings gains. To better manage debt, it’s best to make regular, fixed payments above the minimum amount, and to make extra repayments when possible. If you have multiple debts, such as different credit cards and loans, investigate consolidating them. This involves rolling your different debts into one loan, such as your mortgage or a personal loan, at a lower interest rate.

With debt under control, it’s easier to draw up a regular savings plan and to put away as much as possible each month.

The trouble with saving

“Official interest rates are low – that's great if you're looking to get a mortgage right now, but not great if you're trying to save money”

Unfortunately, there are often hurdles to overcome during your savings journey. One is the current low interest rate environment which could dampen returns from low-risk investment strategies, such as cash savings or term deposits.

“Official interest rates are low – that's great if you're looking to get a mortgage right now, but not great if you're trying to save money,” observes Rodney Greenhalgh, head of investment product solutions at BT Financial Group.

“So if you’re saving to buy a house in, say, five years’ time, you may need to rethink your approach,” he says.

Thurecht says instead of focusing on low interest rates, rather zoom in on how much and how often you are saving.

“The key is consistency, discipline and regularly putting away as much money as you can. If you are saving say $1,000 a month, and you can get it up to $1,100 a month, that will make a much bigger difference than an interest rate increase.”

“If you put money in regularly, you are using a strategy that we call dollar cost averaging – this means you are drip feeding some money in on a regular basis which helps to smooth out the ups and downs of market movements.”

He says how you approach your savings should really depend on your timeframe and how much money you have behind you.

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“If you have a regular amount you are setting aside, and you are starting with a small base, then the most effective way to save for a short period of time is going to be to put that cash into a high interest savings account,” he says.

“If you have some money saved up, then a term deposit is certainly worth looking at. For any period less than five years, we would advocate cash. You may not be getting any growth, but you are also not exposing that cash to the risks of the market. If your time horizon is five years or a bit over, you could look at a diversified portfolio through a managed investment.

Thurecht says implementing a dollar-cost averaging strategy, by “drip-feeding some money in on a regular basis”, will help to “smooth out the ups and downs of market movements”.

This is different to a putting a lump sum in. If the market goes down, you are buying your investments at a lower cost, while the opposite applies if the market is buoyant.

The value of diversifying

Greenhalgh says a diversified investment portfolio, which could include cash, bonds, shares, listed property and exchange traded funds (ETFs), allows you to match your targeted returns with your risk appetite.

But he adds that those with a higher appetite for risk could also consider a share portfolio, which offers the highest potential returns with the highest level of risk.

With shares, there’s always a risk that the value of your investment will go down. Share markets are cyclical and influenced by both company specific factors and wider economic or political trends.

“The higher expected return of the portfolio often corresponds with an increase in risk or the variability (peaks and troughs) of those returns,” explains Greenhalgh. “That's why it's so crucial to match your choice of portfolio with your comfort level of risk.

“But what we have seen when looking back in time is that growth assets, such as shares and property, have outperformed defensive assets such as cash and fixed income (like bonds).”

How a fund manager can help

“You should also be looking to maximise your after-tax returns. This means you should be looking for a lower turnover portfolio (that is, less frequent buying and selling by the fund manager) which will result in a lower tax liability.”

If you decide to take the route of a diversified investment portfolio or share portfolio, you’ll need to decide whether you want to go it alone or use a fund manager.

Going it alone may reduce your costs and give you more control over your investments, but you will also need time, ongoing enthusiasm, skills and knowledge to get the best out of your investments.

On the other hand, fund managers are experienced and knowledgeable – often investing and researching markets on a daily basis.

Fund managers also ‘pool’ their investments, providing you with access to a range of assets and markets you would not have access to on your own. This allows you to diversify your investments, reduce your risks and smooth out any short-term fluctuations in the markets.

“You should also be looking to maximise your after-tax returns,” adds Greenhalgh. “This means you may benefit from a lower turnover portfolio (that is, less frequent buying and selling by the fund manager), which will often result in a lower tax liability.”

Thurecht also believes it’s important to have a specific target in mind when investing.

“Don’t just leave your savings until you need to spend the money. Have a very clear idea what the end goal is, and keep an eye on how you are tracking towards that goal. Take on the least amount of risk that you need to reach that goal at the given point of time.

“So, if you are very close your goal, it may be appropriate to move your investments back into cash to reduce your risk.”   

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Diversification is key to wealth creation

By Daniella Iaconco

Whether you’re dipping your toes into the investment pool, or you’ve done a few laps already, you may be surprised to find that diversifying your assets could mean the difference between a comfortable retirement and one dogged by financial insecurity.

When it comes to investing, many Australians tend to blindly follow the same path as their parents and grandparents always have: that is, to buy property. While property can be a solid investment strategy, given its low volatility and guaranteed long-term growth, people tend to ignore other possible investment strategies – to their detriment.

Don’t put all your eggs in one basket

“Diversification…can be used as an important tool to match the level of risk and return expectations.”

Whether you are looking to invest for retirement through a self-managed super fund (SMSF) or outside of your superannuation, the common mantra of industry experts is diversification. The savvy investor would include multiple investments in their portfolio. That way, if one of your assets isn’t performing so well, one of the others can compensate for this, thereby reducing the risk to your overall finances.

“Diversification across asset classes and global markets can help deliver strong consistent returns over the long term and can be used as an important tool to match the level of risk and return expectations of the individual,” says Rodney Greenhalgh, head of investment product solutions at BT Financial Group.

“The question to ask is whether that asset, and its weighting in the SMSF, is aligned with the SMSF’s long-term strategic goal.”

A recent ATO report into SMSFs highlights the need for trustees to diversify their investments. Self-managed super funds have increased by 29 per cent in five years to 534,000, with total assets growing to $557 billion. In 2013, about 60 per cent of SMSFs held more than half of their assets in listed shares or cash and term deposits.

The SMSF Association says that, in theory, there is no asset class that should be excluded from an SMSF.

“Rather, the question to ask is whether that asset, and its weighting in the SMSF, is aligned with the SMSF’s long-term strategic goal,” says Graeme Colley, the SMSF Association’s director of technical and professional standards.

There are many new investment strategies you may want to consider to help maximise your SMSF returns. While, traditionally, interest-bearing cash and term deposits made up a large chunk of SMSF investments, this is beginning to change – thanks to historically low cash yields.

“Trustees who relied on these deposits for income will have to reassess their position,”

says Colley. “Property, listed or unlisted, offers SMSFs a degree of capital security, a predictable yield, and capital gain. Unlisted property, however, lacks liquidity, although for trustees in the accumulation phase that is not an issue. [However] it could be in the pension phase.”

Investment choices to suit your stage of life

The kind of investment portfolio you design should also marry with the financial requirements of your stage of life. You should employ different strategies to suit short-term, medium- or long-term financial goals.

Saving outside of super can be just as important for many people.

“Investments held outside super offer greater flexibility for when people’s lifestyle changes, or [for them] to reach personal financial goals, such as buying a house or funding their child’s education in the future,” Greenhalgh says.

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The SMSF Association believes a good rule of thumb when investing inside a SMSF is for trustees to be more aggressive in the accumulation phase, with higher weightings in shares and property and fewer in cash and fixed interest, and to have a more conservative asset allocation as retirement approaches.

In the pension phase, trustees typically structure their funds to ensure capital preservation and income, with asset growth a lesser priority.

“Individual trustees in the accumulation, drawdown or pension phases will have their own predilections as how to best structure their portfolios,” says Colley. “Diversification of the portfolio is key to assisting with stable returns and reduced volatility in the longer term.”

The benefits of shares

Both direct shares and exchange traded funds (ETFs) are recommended by advisors for portfolio diversification, and can easily complement other investments in your portfolio. You can also quickly liquidate your holding if you need cash to fund your retirement.

However, if you are purchasing shares as part of your SMSF, there are special rules that restrict how those shares are held by the fund. The main rule is that each parcel of shares is held in a bare trust arrangement. As the name suggests, this is simply a trust that is bare or naked without active duties to perform at that point in time.

An ETF is an investment fund that is traded on the stock exchange and tracks an index such as the NASDAQ or Dow Jones. ETFs offer diversification to a group of equities, market segments or styles – often in markets where it is difficult for an individual investor, such as emerging markets. ETFs have lower fees than managed funds, they trade like a share, and the dividends are reinvested immediately.

“Where SMSFs are underweight is in international shares, although the latest research by Investment Trends and Morningstar, published in February this year, shows a growing interest in international equities.”

“Increasingly, trustees are finding ETFs appealing. But there are downsides and, like all things SMSF, it pays to get specialist advice,” Colley says.

The Association of Superannuation Funds of Australia (ASFA) estimated that direct holdings of shares by superannuation funds accounted for around 33 per cent of the total ASX market capitalisation in January last year.

“Where SMSFs are underweight is in international shares, although the latest research by Investment Trends and Morningstar, published in February this year, shows a growing interest in international equities,” Colley says.

There are also tax benefits if a superannuation fund borrows to purchase shares listed on the stock market.

For investing outside of SMSFs, shares are also a good way to diversify your portfolio.

Phillip Win, managing director of Profile Financial Services, says: “In our practice, we advise clients to invest in a mix of ETFs, managed funds and direct shares.”

‘Safe as houses’

Residential property is rightly perceived as ‘safe as houses’. It is a particularly attractive asset for younger investors because property is generally a more long-term investment, with higher capital gain.

There are also significant tax advantages for residential property. For superannuation fund investors, however, these concessions are either not available, or not as valuable. When you come to sell the property for your retirement it attracts more capital gains tax.

Experts caution never to buy anything for short-term tax advantages.

“In a SMSF, or any asset, you want growth. If you’re not drawing on the asset you don’t need income from it,” Win says.

“Historically, residential has more of a growth component than an income component. However, as you mature and get older and require liquidity, you may need to consider different types of exposure, say commercial or industrial, because they have longer term tenants, higher bonds, guarantees and a higher yield.”

With commercial property investment while you don’t tend to get the same level of capital growth over time that we see in residential property, you don’t generally get huge fluctuations in capital value over a period of time.

So when you come to make your next investment decision, instead of simply sticking to the well-trodden path of your forebears, think outside of the box a little to broaden your investment horizons and ensure you’re not left out in the cold. 

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Why trading is like a strategic game of chess

By Jonathan Jackson

Strategy is the difference between winning and losing a chess game, football match or even a business contract. And for stock market traders it could also mean the difference between higher returns or declining profits.

The problem with most part-time or hobby investors is they take semi-educated guesses at what stocks will rise and fall. This is an approach fraught with danger, and one that could do psychological as well as financial damage should things go wrong.

Louise Bedford, a psychology graduate and founder of The Trading Game, a trading and education resource that provides information on everything from strategy to psychology, prepares traders for the mental and emotional battles ahead.

“The interesting thing about trading is that the psychological problems that bedevil traders are universal, in that they also affect all individuals involved in complex or stressful decision making,” says Bedford.

Bedford cites the psychology behind fighting bushfires as a stressful decision-making process that traders could identify with.

“We are emotionally as well as financially invested, so we struggle to alter our strategy.”

“Dr Mary Omedie of Latrobe University has done some interesting work in the area of decision making by fire fighters,” Bedford says. “In her simulations she has found that, once firefighters commit resources to a given fire, they are very reluctant to remove these resources to deal with a secondary threat. They are emotionally anchored in their decision, and are therefore reluctant to change their strategy.”

Bedford says these are the same issue traders face when things begin to go wrong with a given trade.

“We are emotionally as well as financially invested, so we struggle to alter our strategy.”

The challenge for traders is to take the emotion out of the decision-making process. This is easier said than done, but there are ways to overcome the emotional barrier.

Find a mentor and advisor

The key to sustained success is support. Finding this is one of the most important strategies any trader can implement.

Bedford cites the example of a trading group called the Turtles, formed by Richard Dennis and Bill Eckhardt. Dennis was convinced trading was a skill that could be taught, so he set out to prove it.

He recruited 21 men to follow a system, trading a range of commodities, currencies, and bond markets, buying when prices increased above their recent range, and selling when they fell below their recent range. After its formation in 1983, the Turtles grew to become one of the most successful groups of traders in the world.

“Dennis chose a variety of different people from all walks of life who responded to a newspaper advertisement,” Bedford says. “Only about 50 per cent of this original group continued trading. The others who quit could not follow the simple trading system set out for them, due to some form of psychological resistance. The remaining group is called the Turtles, and they are probably the most successful trading group of all time.”

“The best traders have been heavily influenced or personally mentored by other exceptional traders.”

One reason for this is that each ‘Turtle’ had someone to learn from or confide in.

“So many traders find that trading the markets is a lonely endeavour. You don’t have to do this all alone. The best traders have been heavily influenced or personally mentored by other exceptional traders. Without some sort of external input, it’s really hard to see where you need to improve. By finding someone with a brilliant track record to take you by the hand, you’ll break through your trading barriers with record speed.”

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Value and growth investing

Once you have your head in the game and someone to guide you, it’s time to look at ways of investing. You could look at value investing, growth investing or a combination of both. Top advisors will steer you towards a mix of value and growth stocks.

Popular value investing tactics include: buying businesses instead of stocks, integrating a margin of safety (when market price is significantly below your estimation of the intrinsic value), investing in high quality, sustainable competitive advantages including company assets, attributes, or abilities that are difficult to duplicate and provide a favourable long term position over competitors and conducting in-depth research and analysis into stocks and business performance before you make a decision. It is this approach that turned super trader Warren Buffett into the ‘Oracle of Omaha’.

When it comes to buying businesses, Michael Kodari of Kodari Securities (KOSEC) says you must take a long term approach that takes into account the overall performance of the business, not just its stock price.

“When you are putting your money into stocks, you are purchasing a complete part of a business and your primary focus should revolve around how the business will be doing in the next three to five years. Many wise investors concentrate on the enterprise value including debt and all cash rather than the price of the stock.”

Kodari goes on to say that the foundation behind profitable value investing is ultimately the margin of safety.

“The price you pay, over a short period of time, while not the only factor, is very important in deciding if your individual investment will be profitable. The trick here is to pay something less than the real value for the business: the greater this distance is, the larger margin of safety you have. In simpler words, you will have to face lesser downsides when things get out of hand, and greater upsides when the times are going great.”

“A combination of growth and value stocks that increase wealth in the medium- to long-term is the surest way to find success in trading.”

In a growth investment strategy, investors seek out stocks that have good potential for growth. In most cases, growth stocks are defined by companies whose earnings are expected to grow at an above-average rate compared to its industry or the overall market.

A combination of growth and value stocks that increase wealth in the medium- to long-term is the surest way to find success in trading.

One final thing to consider is diversification. Diversifying your investment capital across different asset classes, instruments or markets will spread the risk and leave you less vulnerable to market fluctuations.

Your best defence in the market is your best offence, so build up your knowledge and have a list of reliable experts on hand that can provide assistance if you need it. Fall into the trap of making semi-educated guesses, and you might find your foray into the stock market is not as successful as you’d hoped.

5 strategies that make you a better trader:

  1. Get your head in the game. You won’t get anywhere unless you have the right mental attitude. Once you are confident with trading, your win-loss ration should improve.

  2. Find a support group, mentor or an advisor who can guide you in ways to trade, what to trade and when to trade. Advisors are crucial in keeping you focused.

  3. Find a trading strategy that works for you. This may be growth, value, or a combination of both.

  4. Trade for the medium- to long-term. Quick profits are nice, but hard to come by. Look to your long-term security.

  5. Diversify your investments and spread the risk.