You have a good job, stable income and you’re saving some money every month. You might be thinking to yourself – how do I start investing?
The truth about investing is you don’t need tens of thousands of dollars to start. In fact, you can start buying shares for as little as $500. Moreover, online discount brokerages such as Etrade will offer you $500 of free brokerage when you sign up for a new account. Let’s pretend that you have $5000 saved up and you want to start investing, what are your options and how would you go about starting your own investment portfolio?
I did mention that you can start buying shares for $500. If you have $5000, you have more than enough to own several shares and build a diversified investment portfolio. There are several things you need to set up:
When you go to a Commsec, a Nabtrade or Etrade to open a share trading account, you will be promoted to also open a cash management account that is linked to the share trading account. These share trading accounts will also give you access to research reports , detailed company statistics and tools such as stock watch-lists and filtering. This should take no more than several days to set up. Once the process is completed, you are ready to trade.
What stocks should you buy? When you have $5,000, you might only have enough money to make 3 -4 purchases. The safest way to make your first purchase is to buy large cap or blue chip companies. These companies are very big and established and hence they’re considered less risky. Take a look at the ASX50 to find some of the largest companies in Australia. The big four Australian banks will be on the list, as will telecommunication companies such as Telstra and other household names. Chances are you will both know and understand some of these companies quite well, as such it’s not a bad idea to own some of these companies that you like or know well.
If you have a large appetite for risk, you may look at mid-caps and small-caps. These companies are a lot more risky, but with higher risk comes the possibility of much higher return. Some mid-caps and small-caps have huge growth potential. However, identifying winners and losers in this category is no small task. If you are new to investing, the proceed with caution!
The fundamentals of sound investing is to buy good stocks at a fair price. You will need lots of time and research to fully understand what makes a good investment decision. The key here is to read as much as possible. Here’s a list of wonderful books and resources for you to get started:
Once you have made your purchases. The job is not done, you need to continually monitor your portfolio and monitor the market have opportunities.
When you buy shares directly, you are directly owning a piece of a company listed on the sharemarket. When you are buying managed funds, you are buying ‘units‘ in a pooled fund, which then owns the shares of listed companies. This is an important distinction to make.
The big advantage with managed funds is that you can rely on the investment nous and judgment of a professional investment portfolio manager. You don’t need to make any investment decisions, or do lengthy research and you since you are owning a part of the ‘fund’, you will have access to the diversification of the fund (something that is otherwise hard to do if you only have $5000). Ultimately diversification spreads out your risk and positions you to growth your money while limited downside risk.
While you can access the professional expertise of portfolio managers, you also have to pay them for the management of your fund, and sometimes you also have to pay for the superior performance of the fund. Management fees are typically around 1% and performance fees can be as high as 25%. As such, it becomes important to pick a well-respected fund manager and also pick the right fund for your risk tolerance level and investment goals.
The most well known fund managers in the country are:
Fixed interest investments are generally safe and include things like term deposits, corporate and government bonds or even a high-interest savings bank account (check out Rabo and UBank). When you have an investment portfolio, chances are you will have some amount of your portfolio in cash, you can put some cash into a higher-yielding vehicle such as a 6-month term deposit. See Australian Money Market for a comparison of term deposit rates.
If you are super conservative when it comes to risk, you may have a portfolio completely made of fixed interest securities. At least you’ll be getting the interest payment every month. If you take this approach, you’ll miss out on capital growth opportunities offered by the share market.
A new breed of technology platforms have enabled low cost and automated investment service. These platforms are popularly referred to as ‘robo-advisers’ or ‘online investment advisers’. Robo-advice is simply using a combination of software, algorithms and ETFs to offer investors a well-diversified investment portfolio for very low cost (typically 0.2%-0.4% of your funds). Best of all, it is completely automated and takes away the usual stress and hassle of managing an investment portfolio.
When you invest with a robo-adviser. Your money is allocated into a basket of ETFs (exchange traded funds), which are investment fund traded on the stock market. ETFs generally track the movement of the a basket of shares or bonds, therefore mimicking the returns of various sections of the sharemarket. This means that you don’t own any shares directly, but you own a basket of ETFs that simply track movements of different stocks on the stock market. As such they are very cheap to manage and provide very high efficiency.
However, since ETFs simply track indexes, it is considered to be a passive form of investing. Unlike investing with a fund manager or investing in direct shares, you don’t actively pick stocks or adjust your portfolio. While you may get the return of the basket of ETFs, you will be highly unlikely to outperform the market or achieved superior returns via active stock picking and investment management.
(ProAdviser is currently developing a free automated investment platform – sign up for early access here)
The truth is that it doesn’t matter how you start. What matters is that you have made start. If you like to take complete ownership of your stocks and enjoy taking the time to research and analyse companies, then buying direct shares will be suitable for you. If you like to rely on the skills of a fund manager, then take your time to research some managed funds. If you’re attracted to an online and automated investment portfolio, then a robo-advice service will be the perfect way to start.
Investing is a long term game. Some years your money will grow a lot, and some years you will lose money. It takes persistence and patience to succeed. Warren Buffett, perhaps the most legendary investor ever lived, has this to say about his investment philosophy:
If you like the ideas in this article then please feel free to share your thoughts and leave your comments below!
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