Author: openjargon

Ever heard of the ‘miracle of compound interest‘ when it comes to investment?

Legend has it that Albert Einstein once declared: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”. 

Let’s explore this further, and we’ll also take some tips from a professional financial advisor on how to leverage compound interest across a range of investment asset classes.

What is compound interest?

Compound interest is basically earning interest on interest. It means you keep reinvesting the returns you make on your investments to make the next set of returns even higher.

Raj Pradhan, an advisor at Findex, says:

Harnessing compounding interest to grow your retirement savings could open the door to a world of financial possibilities and see your superannuation balance and investment returns multiply over time. 

Pradhan explains compound interest as follows:

… suppose you invest $10,000 in an asset that generates a 7% annual return. In the first year, you earn $700 in interest, bringing your total investment value to $10,700.

In the second year, the 7% return is applied to the new total ($10,700), resulting in a higher interest amount.

Over time, this compounding effect can help accelerate wealth creation and, subsequently, enhance your retirement fund.

Pradhan says an effective compound interest investment strategy begun at a young age reduces the need to add more money to your investments to achieve significant growth.

He says this makes the goal of building wealth more efficient, which is good news for most Australian investors who tend to have longer-term goals.

According to a recent Findex survey, planning for retirement (54%) and building wealth (53%) are the top two reasons Australians invest regardless of the investment asset classes they choose.

However, time is a key factor in maximising investment returns from compound interest.

Starting young will mean someone on an average wage can still amass good savings because they’re leveraging the benefit of time.

But if you can, ploughing spare money into your investments along the way will turbocharge the compound interest effect.

5 investment strategies using compound interest

Here are Pradhan’s five investment strategies to help you leverage the power of compound interest.

1. Regularly contribute to your superannuation fund

Pradhan says one of the most significant applications of compounding interest is in building retirement savings via superannuation.

He says:

Imagine starting to invest in your superannuation fund early in your career. By consistently contributing and reinvesting earnings, you harness the power of compounding interest to grow your future nest egg.

For example, let’s consider a scenario where you start investing $10,000 in your superannuation fund at age 25. Assuming an average annual return of 7% compounded annually, by the time you reach age 65, your investment could potentially grow to over $150,000.

2. Reinvest dividends earned from ASX shares or managed funds

Investing in a diverse range of quality ASX shares or international stocks can provide opportunities for capital appreciation and dividend reinvestment, Pradhan says.

Most ASX dividend shares offer dividend reinvestment plans (DRPs), which makes reinvestment an automatic process. The company will simply use your dividends to buy more shares for you.

Pradhan also says choosing professionally managed funds that reinvest dividends and distributions can compound investment returns over time.

3. Allocate funds to other asset classes to diversify

Besides ASX shares, Pradhan suggests investing in other assets like property or bonds to leverage compound growth and achieve diversification, which lowers risk.

He says: “Utilising leverage through property investment can amplify compound returns through rental income reinvestment and property value appreciation.“

Check out the returns from shares vs. property over a 10-year period here.

4. Open a high-interest savings account

Pradhan recommends leaving earnings in your high-interest savings account so they can compound for the long term.

According to RateCity, the highest interest rate available in the marketplace today is 5.75%. That’s well above the current inflation rate of 3.6%.

5. Prioritise low-cost and tax-efficient investments

Pradhan points out that minimising expenses and taxes will allow more capital to compound efficiently.

In The Fool’s Education Centre, you can learn about many low-cost investment options, such as index funds. We also recently profiled the 10 cheapest ASX ETFs on the market today.

In terms of tax efficiency, franking credits are a huge tax benefit for ASX shares investors.

You can also earn yourself a helpful tax deduction by contributing extra funds to superannuation each year. Just make sure you don’t exceed the threshold for concessional (pre-tax) personal contributions.

For FY24, the concessional contributions cap is $27,500. This includes your employer’s Superannuation Guarantee payments, any salary sacrifice amounts you’ve organised with your boss, and any personal contributions you make into your superannuation fund directly. In FY25, the cap moves up to $30,000.

Here are 4 other ways to get money into your superannuation before 30 June.

The post Expert reveals 5 investment strategies using compound interest appeared first on The Motley Fool Australia.

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Last week was an unnerving one for borrower. A hotter than expected Australian inflation reading sparked fears that interest rates will have to go higher before they go lower.

In case you missed it, the monthly Consumer Price Index (CPI) indicator rose to 3.6% for the 12 months to April 2024. This was up from 3.5% in March and 3.4% in January and February.

Economists had been expecting CPI to fall to 3.4%, so a surprise increase shook financial markets.

The economic team at Westpac Banking Corp (ASX: WBC) has been running the rule over the report. Commenting on April’s CPI reading, the bank said:

By subcategory, there were various differences relative to expectations which offset one another – a notable increase in prices for clothing and footwear (+4.0%mth) and a pull-forward of the health insurance premium increase met by another fall in electricity prices, principally due to another round of energy rebates in Tasmania (–1.9%mth).

What does this mean for interest rates?

Westpac’s chief economist, Luci Ellis, notes that the Reserve Bank of Australia (RBA) will be watching the data very closely and acknowledges that rate cuts could be pushed back. But Ellis feels the central bank can’t wait too long. She said:

With the RBA in data-dependent mode, surprises in the data flow could change the timing of rate cuts, but not the underlying decision process. The RBA Board recognises that monetary policy is currently contractionary. At some point, it must reduce that restrictive stance and return to something closer to a level it considers to be ‘neutral’. Otherwise, inflation would eventually decline below the target range. Because monetary policy works with a lag, rate cuts need to start before inflation has returned to target.

The good news for homeowners is that Ellis continues to believe that interest rates will start heading lower from around November. The chief economist adds:

The question the RBA Board will be asking itself is what it needs to see to be confident that inflation will return to target soon. The likely trajectory of disinflation from here precludes a rate cut much before November. Trimmed mean inflation was still a full percentage point above the top of the target range over the year to the March quarter. Services inflation – a key focus for the RBA Board at present – remains elevated. It will take time for enough evidence to accumulate to convince the Board that the disinflation is on track.

But if things turn out as we expect, a forward-looking central bank would want to start reducing the restrictiveness of policy by about November.

This will see interest rates end the year at 4.1%. After which, Westpac is forecasting rates to fall to 3.85% by March 2025, 3.6% by June 2025, and then 3.1% by December 2025.

The post Here’s when Westpac says the RBA will now cut interest rates appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has positions in Westpac Banking Corporation. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Despite the S&P/ASX 200 index (ASX: XJO) rising 7.5% in the last 12 months, many shares with strong fundamentals are still trading at attractive valuations.

Among these, Qantas Airways Ltd (ASX: QAN) stands out as an excellent choice, according to one top broker.

As my Foolish colleague James covered this week, analysts at Goldman Sachs believe Qantas shares remain undervalued. In a recent note, they set a price target of $8.05 apiece, with an upside potential of 33% over the next 12 months.

Why this ASX 200 share is a bargain

Goldman Sachs analysts reckon that the market is underestimating Qantas’ stronger earnings potential.

The broker cites Qantas’ $1 billion cost reduction program and improved operational performance as key drivers of future growth.

In particular, it projects “earnings capacity to structurally improve… with FY 2024 estimated [profit before tax] 51% ahead of pre-COVID levels”.

The current undervaluation is a prime buying opportunity, Goldman says, noting “[t]he discounted valuation versus peers and its own history implies that the market is pricing in a trade-off between investment (fleet and customer) and capital returns (dividends & buybacks)”.

Qantas’ loyalty division is another key growth driver. In the first half of FY 2024, the division contributed $270 million in underlying earnings before interest and tax (EBIT), up 23% year-on-year.

The airline aims to boost this segment’s EBIT to $800 million to $1 billion by FY 2030, enhancing overall profitability.

Add dividends to your Qantas shares

Moreover, Goldman Sachs anticipates the return of this ASX 200 shares’ dividend soon, adding to the bullish potential for Qantas shares.

Moving forward, Goldman Sachs expects Qantas to maintain a strong balance sheet, allowing for capital returns alongside fleet renewal. This, it says, should support healthy dividends and share repurchases.

The company has already announced an increase in its on-market share buyback by up to $400 million in its H1 FY 2024 results.

Analysts at Goldman now forecast a total of $1.6 billion in buybacks and dividends over FY 2025-2027. This includes $1.2 billion in dividends (73.6 cents a share).

If this were to materialise, it would translate to a forward dividend yield of 12.4% at Qantas’ current market capitalisation of $9.6 billion at the time of publication.

Goldman isn’t the only broker bullish on Qantas. The total 17 brokers covering the stock listed on Bloomberg are either neutral or bullish on the company – but none bearish – according to The Australian Financial Review.

How attractive is the valuation vs. ASX 200 shares?

Currently, Qantas trades at a price-earnings ratio (P/E) of 6.6 times — significantly below the current ratio of 18 times for the exchange-traded fund (ETF) that tracks the benchmark index, iShares Core S&P/ASX 200 ETF (ASX: IOZ).

This represents value, as investors are paying $6.60 for every $1 in Qantas’ earnings versus $18 per dollar of earnings for the ETF.

In return, you are potentially buying shares in a company that recently produced $1.25 billion in underlying profit before tax. Qantas is also in “new identity” mode after recent scandals tarnished the brand. And, it is projected to return $1.6 billion of capital to shareholders in the next three years.

Foolish takeaway

Qantas could be an interesting investment opportunity due to potential valuation mismatches if analysts are right. Strong earnings potential and the imminent return of dividends are two factors that could make Qantas a top pick for savvy ASX investors looking for growth and income.

Qantas shares are trading 13% higher this year to date but are down 9% on this time 12 months ago.

The post ASX 200 shares are still cheap! Here’s one to consider buying now appeared first on The Motley Fool Australia.

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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Looking for promising ASX growth shares to add to your portfolio? The Australian share market is a great place to begin. As a reminder, a growth stock is a company that is expected to grow revenues and profits faster than the overall market.

Investors often pay high prices for these companies, but all that glitters is not always gold. While the allure of “growth at all costs” is appealing, one has to look for high-quality businesses in the space.

Here are two top ASX growth contenders that I think could offer significant upside potential.

Flight Centre Travel Group Ltd (ASX: FLT)

The first ASX growth share on the radar today is the Australian-based travel group Flight Centre. Trading at $18.85 per share at the market close on Friday, the stock is down more than 11% this month.

Flight Centre, one of the largest travel groups globally, has a footprint in leisure and corporate travel across the Asia-Pacific region, the Americas, Europe, the Middle East, and Africa. This huge wingspan (pardon the pun), in my opinion, places the company well amid the travel sector’s ongoing recovery after COVID-19 smashed the sector in 2020 and 2021.

The team at Morgans gave Flight Centre a buy rating in a recent note. The broker said the company had the “greatest risk-reward profile” of travel stocks it covered, adding that it was particularly attractive because the business targeted a 2% net profit margin in FY 2025.

Morgans also noted that Flight Centre’s risk lay in executing its changing business model. But, the company was “well placed over coming years” to capitalise on trends in travel recovery.

The broker rated the ASX growth share as an add with a $27.27 price target. This represents a 44% upside potential.

NextDC Ltd (ASX: NXT)

NextDC has been a stellar performer in the ASX growth space, with its shares rising from $8.15 in October 2022 to $17.79 at Friday’s close.

It provides colocation services through its Tier III and Tier IV data centres. These are located in Australia and the APAC region.

The company looks to benefit significantly from the surge in demand for cloud computing and artificial intelligence (AI). As noted recently, AI global revenues are expected to grow at a compound annual growth rate (CAGR) of 72%, according to UBS.

Morgan Stanley rates NextDC a buy with a $20 valuation, whereas fellow broker Morgans values it at $19 per share. This implies a potential gain of 13.5% at the time of publication.

Should you consider these ASX growth shares?

Although past performance is never a guarantee of future results, I think Flight Centre and NextDC represent two interesting opportunities in the ASX growth space.

Both names have strong analyst backing. Flight Centre’s strategic transformation and recovery in travel demand, combined with NextDC’s leadership in data centre services, could be underlying themes that rally both shares.

The post Growth spurt: 2 ASX growth shares set to skyrocket appeared first on The Motley Fool Australia.

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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Flight Centre Travel Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.