Rohan Rajiv from the daily blog, A Learning a Day recently wrote “The definition of strategy that I use in my day to day is that good strategy is defining the right sequence of steps that helps us navigate trade-offs and achieve the end outcome.”
This definition of strategy is a perfect fit when it comes to building wealth. First, you need to define a clear goal like when you want to retire and how much you will need for living expenses. Then, there’s a series of steps to take, and they need to be taken in the right order. Finally, there will be trade-offs, such as cutting back on luxuries or holidays. It’s essential to make sure those sacrifices are worth it!
This got me thinking about the numerous benefits of having a well-defined, long-term investment strategy that’s thoughtfully planned out… here’s the top 10 benefits.
(1) Provides context for making future lifestyle and financial decisions
Can you afford to upgrade your home? Can you afford to reduce your working hours three years earlier than planned? Can you afford to send your kids to private school?
These kinds of questions are impossible to answer without the context of a long-term strategy. If I know your strategy and things like how much cash flow it requires to work, and the key assumptions behind it, then I can easily measure the financial impact of any lifestyle or financial decisions. I can assess whether these choices will put your long-term goals at risk.
Without a well-defined plan to measure against, you’re flying blind, and that significantly increases the risk of making costly mistakes. The problem is, these mistakes often don’t become apparent until years later, after you may have already spent a lot of time heading in the wrong direction.
(2) It forces you to define what you are working towards
You don’t need a strategy if you don’t have a goal.
Creating a strategy forces you to define exactly what you’re working towards. Your goal doesn’t need to be ultra-specific. It could be something broad like retiring after 60 with $120,000 in annual living expenses. Or it could be more targeted, such as buying your dream home, getting into the property market, or becoming debt-free.
As the saying goes, “If you don’t know where you’re going, any road will get you there.” But when it comes to building wealth, that kind of directionless approach is very risky. Chasing random investment opportunities without a clear end goal in mind is almost guaranteed to be inefficient and could easily lead to poor decisions that set you back rather than move you forward.
Set a goal. Any goal is better than none.
(3) Make sure trade-offs are worthwhile!
Most investment strategies come with trade-offs. To build wealth, you need to consistently commit capital, such as making monthly share market investments, covering the holding costs of an investment property, or making extra super contributions.
The alternative, of course, is using that money for lifestyle spending such as buying more “stuff,” travelling more, or enjoying other luxuries.
For most people, the goal is to have a good balance – enjoying life today while still investing some money for the future. After all, building wealth is a journey, not a destination.
That said, there are times in life when the trade-offs are more significant. And if you are making short-term sacrifices, you need to be confident that they will pay off in the long run. The last thing you want is to give up things you enjoy only to find out later that those sacrifices weren’t necessary, or worse, that they did not move you closer to your goals.
(4) What steps and in what order
Drafting a financial strategy is a lot like planning a road trip. If you just get in the car and drive without a map or a plan, you’re likely to get lost or waste time taking unnecessary detours. But if you plan your route ahead of time, you will know exactly which roads to take, where to stop for fuel, and how to reach your destination as efficiently as possible.
When it comes to financial strategies, I typically would not recommend prioritising super contributions for someone in their 30s who has a large home loan or has not yet purchased their forever home. Similarly, I usually suggest investing in property first before building a share portfolio (so you benefit from compounding capital growth).
Understanding what financial steps to take is crucial, such as, what assets to invest in, how to invest (the methodology), and how to allocate your wealth across asset classes and ownership structures. But just as important is knowing the right order in which to make those investments. A well-considered financial strategy gives you that clarity.
(5) Proactive tax planning is the only tax planning
Your ability to legally minimise tax is significantly reduced if you wait until after a tax liability is incurred. It’s more effective to plan your tax strategy before you purchase or create an asset, whether that’s an investment or a business. It is especially important to understand the likely tax implications of the returns the asset will generate, how long you plan to hold it, and when you may decide to sell it.
By knowing this, your holistic accountant and financial advisor can recommend the most optimal ownership structure and identify other tax planning opportunities. They can assess the impact of short, medium, and long-term outcomes, as well as consider various taxes like income tax, CGT, land tax, GST, estate taxes, and more.
Without a clear view of the future, though, your tax planning options and insights are often limited.
(6) Helping family when it is best for them and you
Many clients tell us that one of their goals is to help their kids get into the property market. The challenge is, you can’t really predict when or if your child will want to buy their first property, where that property will be, how much it will cost, or what their financial capacity will be at the time.
You also don’t want to help them in a way that jeopardises your own retirement – it needs to be affordable. That said, most people realise that receiving an inheritance after you are already financially established can be a missed opportunity. An early inheritance or financial help can be more effective and better position children for financial success and lifestyle improvements.
Having a long-term strategy in place helps you better understand your capacity to assist your children, when to offer help, and how to do so — whether that’s through a loan, gift, family guarantee, or another method. Most importantly, it gives you confidence in knowing how much you can help without putting your own retirement at risk.
(7) Avoid asset allocation mistakes: start with the end in mind
By the time you are ready to have the option of stopping work, it’s crucial that you are in the financial position to do so. This means having a well-diversified portfolio across various asset classes, which may include property, shares, and cash. It also means ensuring your assets are held tax-effectively, maximising the tax-free benefits of super (soon to be $2 million per individual), ensuring your level of debt is manageable, and ensuring your cash flow is not overly sensitive to interest rate changes.
If you want the option to retire or reduce your working hours before the age of 60, it’s important to have a pool of liquid assets available to draw from. That means not having all your assets tied up in super.
Typically, achieving perfect diversification takes time. For example, it’s best to start investing in property early, so in your 30s, most of your investment assets may be in property. Once you’ve built a solid property base, it makes sense to invest in the share market, which many people begin in their 40s and 50s. As you approach your 50s, most people start focusing more on super. Asset allocation generally evolves over time, but by the time you hit 60, you want your asset allocation to be relatively balanced. Achieving this balance can be challenging without a coherent financial plan.
(8) How important is super?
As mentioned earlier, most people don’t really start paying attention to their super until they are about 10 to 15 years away from retirement. However, I think waiting that long can lead to missed opportunities. It’s crucial to ascertain what role super will play in your retirement.
If you expect to have total investment assets of less than $2 million per individual (or $4 million for a couple), your goal should be to figure out how to get as much of your wealth into super as possible, as it’s tax-free. The earlier you start working on this, the better.
That said, because there are limits on how much you can contribute to super each year, it might not be enough on its own. You also need to factor in the risk of living longer, which means you’ll need more wealth to cover your retirement. In this case, investing outside of super becomes essential to supplement your retirement savings.
That said, if your goal is to fully retire before 60, super won’t play a major role in helping you achieve that, at least not initially.
Having a long-term strategy helps you evaluate how important super is to your overall retirement plan and how much focus it should get in your approach.
(9) Don’t waste money on insurance
Personal risk insurances, like income protection, life, and TPD insurances, are crucial for protecting both you and your family. However, these insurances can be expensive, so while it’s important to have enough coverage, you do not want more than you need.
A well-defined financial plan helps us minimise insurance costs because it gives us a clear picture of how much your plan depends on your ability to keep working and earning an income. As your wealth grows over time, your financial plan becomes less reliant on your income, meaning you may need less comprehensive cover. Eventually, there will come a time when you no longer need insurance at all.
Having a clear financial plan makes it much easier to assess exactly how much insurance cover is financially necessary, helping you minimise the cost of coverage.
(10) Life is what happens to you while you’re busy making other plans
A good investment strategy should be flexible enough to adapt as your life circumstances change. Change is inevitable – whether it’s shifts in income, changes in your family situation, or unexpected opportunities.
Having a strategy in place gives you a framework to reassess your goals and adjust your approach when needed. This ensures you stay aligned with your long-term objectives, even when the unexpected comes up.
Bonus advantage: you can go on more holidays!
Yes, you can go on more holidays!
A smart financial plan lets you balance living for today with saving for tomorrow. A plan might include periods where you focus heavily on investing, even if it means cutting back on luxuries for a while. That’s fine, as long as it’s for a defined period.
But I believe building wealth is a journey, not a destination. None of us know how long we have, so it’s not wise to forgo all enjoyment today in the hope that we will live long enough to enjoy the rewards of our hard work.
At the same time, we can’t live as if we’re going to die tomorrow. It’s about finding a balance. Enjoying life today while also investing for the future. A long-term plan helps you strike that balance. After all, there’s no point dying with millions in the bank if you regret not making the most of your money along the way.
