GOOD MONEY: Bottom line, - be realistic about what your money can earn.
GOOD MONEY: Bottom line, - be realistic about what your money can earn. Pogonici

Read the news about our economy carefully

LIKE most investors I'm a big reader of the news, and there's certainly never any shortage of macroeconomic commentary to pore over.

Some reads like fiction, some like comedy - and that's why we need to read news about the economy carefully. It tends to take one position or another, and a healthy dose of skepticism never goes astray.

The times I worry most are when the commentary is uniformly optimistic - shouts of "buy now" make me nervous. But when I read that Chicken Little is correct, and the sky is about to fall in (which of course it never does) I think, gee if everyone is selling, it's got to be time to buy.

Right now our economy is better than most people probably believe. Yes, there's a quite a lot of negative macroeconomic commentary around Trump and trade wars but I'm seeing a reasonable balance of views - some positive, some negative, and some in the middle.

A bit of balance never hurts, so when people ask me if I'm a contrarian investor I explain that I see myself as a commonsense investor. And that's not just based on my views about macroeconomics.

One question I'm often asked is "How can I earn 20 per cent annually on my investments?" Seriously. Yes, on the odd (make that rare) occasion I have earned 20 per cent on an investment. But pick up your calculator and do the sums. No, wait, there probably aren't enough digits. Better use your computer. Because if you take a look at how our wealth would grow with 20 per cent returns each and every year, we'd all be billionaires in no time at all. Clearly, expectations about returns are often out of whack with reality.

A better question to ask is "What can a balanced fund do for me?" And the answer is a return of around 4-5 per cent per annum above inflation. But, and it's a big but, you need to watch for whether that return includes costs.

One thing I know for sure in life is that returns are a hope, but fees are a certainty.

If I can earn 4-5 per cent annually above inflation - and after fees - I'm delighted. And frankly, these days with modern technology streamlining investing, there is no reason for investors to be paying high fees.

Bottom line, be realistic about what your money can earn - and pay careful attention to the returns after costs. No matter how good the economic outlook, there's not much in it for you if you're paying above the odds on your investments. It just means lining someone else's pockets instead of your own.

Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.