When I first started being interested in money and growing my wealth, the most common thing I heard was that I needed to invest in growth assets.
It didn't matter what asset class I chose, be it property or stocks, the number one thing I was told it had to have was growth.
So, like a diligent student, off I went looking for assets that indicated all the right signs that they would be a good growth story over time. In fact, I became obsessed with growth.
If an asset didn't meet the growth criteria, it was discarded faster than a politician breaks a promise.
Now, after more than 20 years' experience studying, researching and implementing investment strategies, I have come to a different conclusion as to what is smart investing.
This may upset some of the gurus, experts and talking heads, however, when it comes to what is going to help you achieve financial freedom, growth is not the number one priority.
Having said that, it is important at this point to highlight that I have nothing against growth, and it remains a key ingredient to your financial success — it just isn't the panacea that we have been led to believe.
What is the most important ingredient then?
The real hero in your quest for financial freedom is cash flow.
When you are building for your financial freedom, the overriding concern is how to meet your ongoing living expenses.
The more cash flow you can generate from your investments, the easier it is to meet your living expenses. Simple right?
The obsession with growth therefore becomes an issue, especially if you are just starting out and don't know what is best for your circumstances. You simply can't pay for your groceries with growth.
Cash flow is king, especially when starting out. You won't ignore growth totally of course.
At the appropriate time in your journey, growth may take precedence. But until you have established a solid base of cash-generating assets, it is all about cash flow.
Smart investing questions
Before you make the leap to investing, there are two questions you have to answer if you want to stay on the path to smart financial success.
First, in what name do you want to own your investments? Now this is an area where I highly recommend you get some advice.
A good tax accountant who understands your goals will be worth every cent you pay them to guide you through what is the best ownership structure for you.
Consider the accountant just a cost of doing business, your business of creating wealth. That way you don't have to be worried about the scary world of tax, and you will be set up for success.
The second question, is what assets do you want to own?
The world of investing is saturated with thousands of options when it comes to where to put your money.
But there are three main assets that should form the backbone of an "invest the smart way" strategy.
They are stocks, property and interest-bearing securities.
Over time, you want to build up a portfolio that has a combination of all three of these asset types. It is a form of diversification that allows you to benefit from the movements in each market.
What to do now?
Everybody's circumstances will vary and that is why I encourage people to get a coach to help.
However, let's look at a few examples that could apply to you today.
I have $2000. What should I buy?
Right now there is a lot of talk about stock markets being ready for a large correction, and property markets are falling slightly in the major Eastern states.
So with a small amount to get started, you might be best placed to look at interest-bearing securities.
In fact, if the commentary is right about the short term, a really good option would be gold.
And the great news is you can get exchange-traded funds that specialise in gold that still provide cash flow in the form of dividends.
If the markets do correct, gold will be a beneficiary, and you will be on your way.
I've saved $10,000. Where should I invest?
If you have a little more cash to invest, then you are better placed to spread your investing dollars across the asset classes.
In this case, you could allocate a little to each of the classes, to get your diversification strategy started straight away.
Since you don't have enough for a direct investment in property, you could also look at some of the exchange-traded funds that target property investments.
This strategy retains the cash flow is king mantra, and exposes you to some potential growth at the same time.
I've managed to pull together $50,000
If you have more significant savings, you are able to consider direct property investing in addition to the suggestions for those with $10,000.
It may be that you put some into stocks and gold, and a direct property investment instead of a property ETF.
The key here is to ensure the property investment is cash flow positive. That is, the rent exceeds your costs on a weekly basis, including any tax benefits.
So now that you know the smart way to invest, forget about the old-school advice and plan for your future where your investments pay for your living expenses.
And one final piece of advice, remember that you don't have to pick the best time to buy any of these assets.
Since you are in for the long haul, the best time to invest is right now.
Just keep doing it month after month after month.
- Andrew Woodward is a mindshift.money accredited money coach based in Sydney who teaches people to take control of their money and invest for their future, simply and efficiently. Sign up for his free weekly money tips at theinvestorsway.com.au.