Following the golden rules to good investing health

ASIC chief executive officer Warren Day said, "Before choosing to invest, people should familiarise themselves with the golden rules of investing and understand the associated risks. They shouldn't believe the hype - if an investment sounds too good to be true, it probably is".

Today let's remind ourselves of those golden rules of investment.

First, almost every investment falls into one of three major categories - cash, property or shares. Second, to be a successful investor you need to keep in mind that every decision you make has advantages and disadvantages - there is no perfect investment.

If you choose cash in the bank the upsides are no entry or exit fees and no risk of your money falling in value (except by inflation). The downsides are that there is no chance of capital gain, the return is low, and there are no tax concessions on the income. It is not a long-term investment.

If you choose property, you will probably need to get a reasonable deposit together before you take the plunge, there are usually substantial purchase costs, plus continual outgoings such as rates, and repairs. However, if chosen well you should enjoy good capital growth over the long-term, and some income.

Shares are much more flexible. If you opt for shares you can start with as little as $500 and there should be no entry or exit fees. And there are no decisions to make. Just choose a low-fee index fund that tracks the Australian share market. But if the market has one of its regular bad periods, you could see the value of your investment drop by 20 per cent or more and stay there for several years, before it bounces back.

If you are accumulating money to buy a car, or a home deposit, put every spare dollar in the bank and keep doing that until your goal has been achieved. You can get savings accounts that give you bonus interest if you deposit a minimum amount, or make only deposits and no withdrawals within a month. It won't be a large sum of money, but finding the best deal for your situation is a great skill to develop, and a great habit to have.

Be clear about the difference between investing in shares and trading. Investing means you take a long-term view and buy quality assets that you believe will grow in value over time.

Share traders, however, spend their days trading the various share markets seven days a week in the hope of making a living out of it by buying low and selling high.

Because trading is essentially gambling, it's highly addictive. Psychologists claim the hit you get from a successful share trade is remarkably similar to the hit from injecting drugs. Charlie Munger, Warren Buffett's business partner, summed it up perfectly when he said, "In the modern world, people are trying to teach you to come in and trade actively in stocks. Well, I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin."

Understand that retail trading platforms are designed to encourage addiction. Just like poker machines, every aspect of their design - the hardware, the software, the algorithms, even the so-called rewards - is carefully designed to keep traders at their computer, playing game after game. It is simple and amazingly fast - trades take only three to four seconds - to encourage traders to continue. They induce players to gamble quickly and repeatedly, developing a sort of rhythmic flow that can sweep them away.

The bottom line is, there is no shortcut to wealth - better to get rich slowly, than to go broke quickly.

A few years ago I withdrew my super. I was 58 then and did not intend to return to the workforce due to an injury. I withdrew $116,000 and as it was under the tax-free threshold, paid no tax. A bit later I put $120,000 back into my super as a non-concessional contribution. Does my threshold go back to the $205,000 or is the original withdrawal counted and subtracted from this amount, thus leaving me with a reduced tax free amount for withdrawal next time? I am 62 and on a disability pension so get full benefits.

Once you reach 60, as you have done, all withdrawals from super are tax free. But take advice first, because Centrelink does not treat your superannuation as an asset until you reach pensionable age. A lump sum super withdrawal by itself will not impact your income support, however what you do with the withdrawal may have an impact, for example, if you put it in the bank.

My wife and I are both 69 and work part-time. We own our home and car and have no debts. I have a defined benefit pension from my previous employment and my wife has a modest superannuation account in accumulation mode.

We both intend to continue working for a few years and would like to minimise the tax we are paying on the interest. I am wondering if a better strategy would be for my wife to make a non-concessional contribution to her superannuation account, including using the bring forward provisions, and to then open a pension account where she transfers the money into pension mode.

She would keep her current accumulation account as well to continue to receive superannuation contributions from her employer.

Each year she could withdraw the minimum required from the pension account. I understand that there is no tax on the pension account earnings. Have I missed something here?

You are right on the money. There is no lack of access because of your age, and it's customary for people to have both an accumulation account to receive contributions plus a pension account. She will get a higher return on her super, because the fund will pay no tax, and your taxable income will be reduced. I would expect a good superannuation fund to give a better return than the 4 per cent the bank is giving you.