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Dividends in risky behaviour

All too often people think that taking risk means they are in danger of losing all their money. Technically, with some investments this is true.

But there are varying degrees of financial risk, just like there are varying degrees of risk associated with what we do every day of the week. Walking down the street is considered a low-risk activity; riding a motorcycle less so.

It is all about degrees. In investment terms it is also about understanding the risk that you are taking and the potential reward, so you can weigh up the upsides and the downsides and decide if the investment makes sense.

It helps enormously if you have some idea of your time frame. If you buy an apartment and it declines in value in the short term, it doesn't really matter if you are intending to live there for five to 10 years. You have no intention of selling, so you can ride out a temporary downturn. Ditto with other investments.

"Risk is good for you when you have a long-term outlook," says Deborah Kent, founder of Integra Financial Services.

There are also ways that risks can be mitigated. Let's take my imaginary friend ‘Lisa’, who wants to own an apartment, but is afraid that she won't be able to afford the mortgage if she is made redundant.

Lisa could reduce the level of risk she is taking by making sure that she can afford the loan repayments even if interest rates rise (Kent recommends having at least a 20 per cent deposit and making sure Lisa can afford the repayments even if mortgage rates rise from 4.5 per cent to 7 per cent or 7.5 per cent).

  

Lisa could also take out income protection insurance that would provide an income in case she gets sick or is injured.

Even if something unfortunate did happen, the chances are Lisa will not be in dire straits. If she needed help with the mortgage, she could take in a tenant, she could rent out the whole property and take a cheaper room somewhere else.

Lisa's potential reward for buying an apartment is that over time, property prices tend to rise and because she has borrowed to buy the property, her return will be magnified. If the price of the apartment rises from $400,000 to $450,000 and Lisa has put down a deposit of $100,000, she will have made a $50,000 gain on an investment of $100,000 (transaction, interest and bank costs notwithstanding).

A survey by Roy Morgan Research shows that just 2.4 per cent of home loans in Australia in the 12 months to April 15 were taken out by women aged between 18 and 29, against 4.3 per cent by men. "Men are more likely to give it a go," says Roy Morgan's Norman Morris.

The figures would suggest he is right.

'I'm very independent and don't rely on anyone'

Buying an investment property at age 50 while still single-handedly paying off the home mortgage may seem risky, but Anne-Marie Tolsma is hoping it's a calculated risk that will ensure an independent retirement.

The nurse unit manager took the step after an overhaul of her financial situation on her milestone birthday. "I started to look at my lifestyle. I'm a single person with no children and I'd like to retire at 60 – that's only 10 years away," Tolsma says. "I don't want to be caught short, where I'm having to watch every single thing I spend. I want to continue travelling.

"I thought I better start that day and get things happening." A financial adviser recommended a three-prong approach: negatively gear an investment property, salary sacrifice into super and pay off the mortgage on her home, a four-bedroom house with pool in Cairns.

Some changes had to be made to meet the ambitious plan, including taking in a boarder. Contributing to super required a shift in attitude. "I'm not a huge fan. I've always thought if I put anything into super I'm not in control because it's subject to the market." This is also why Tolsma shies away from the sharemarket. Property, however, is "something tangible to sell so I'm comfortable".

Tolsma bought a new house in an up-and-coming estate for $380,000, for which she receives $420 in weekly rent.

"I'm hoping it goes up in value, I sell in 10 years and have my home paid off," she says. "I'll do some after-hours nursing, where a lot of money can be made from penalties, and then gradually go to part-time and transition to retirement.

"I'm very independent and don't rely on anyone. I'm not a great risk taker. This is a plan which should enable me to still travel, enjoy life and pay for my retirement." 

Case study by Natasha Hughes