Ever wonder what goes on in those shiny city skyscrapers, where billions of dollars change hands each day? Nah, me either.
But that’s because I have seen it first-hand. Don’t believe what you saw in The Wolf of Wall St. Most of it is just guys sitting in front of computer screens, or in meeting rooms with poorly designed PowerPoints. (My friend Amara disagrees and says I just don’t work with the right people, but I call it as I see it).
Anyway, I’ve worked with clients across the finance industry: banks, super funds, insurers, fund managers, advisers, fintechs. You name it, I’ve spruiked them to the media, advised their executives and probably gone drinking with them.
However, I’m not one of them. So I have a particular perspective.
And when people ask me questions like ‘what should I invest in?’, it’s not easy to answer, for two reasons: it is breathtakingly complex and also full of bullsh*t.
So I’m going to do some posts to help you sort through the BS, and share with you what I have discovered about the way money is managed, invested, lent and looked after.
Lesson 1: There is no secret formula.
There are literally hundreds fund managers in Australia, whose job it is to invest in shares (aka equities) on behalf of you, me and our super funds.
And every fund manager has their own style of investing. I liken it to girls and diets. Some swear by Atkins, blood type, food-combining, paleo or low-fat. Trends also come and go, like the cabbage soup diet (which didn’t ever achieve much other than epic farts).
Fundies are the same. There are broad categories of investing, and within those, each one has tailored their own version. So you’re not just on a paleo diet, you’re on a low-carb paleo diet with an autoimmune protocol. (That’s actually a thing, for realz).
Let’s take, as an example, ‘value’ investors. They are the equivalent of shoppers who comb the racks at outlet malls looking for one perfect pair of Jimmy Choos marked down by 80%. So they buy ‘undervalued’ companies and hang out until they become cool. So, actually, it’s more like buying last season’s shoes and waiting five years until peep toes come back in.
Another style is ‘quant’ (short for quantitative). These guys don’t even bother going into a mall. Their shopping equivalent is creating an algorithm that sweeps eBay and buys one bargain pair of heels from every seller. There is still human input, but it’s mainly data-driven.
There are so many more styles, and sub-styles. Saying you’re an Australian equities fund manager is like saying you like Electronic Dance Music. Sure, but do you like house, deep house, dub-step, jungle, trance, or just Calvin Harris (and your rave pass gets revoked if it’s only him).
All these styles do well at different times and in different market conditions. It’s like how I love the last couple of seasons, when midriffs came back in fashion, because I can totally rock a crop-top (regardless of whether it’s age-appropriate). But when boho chic was all the rage, I totally floundered, because I look like a bad hippie hangover in flounces and frills.
Value investors are having a hard time right now because assets are overpriced and there aren’t many bargains to find*. It’s like the beginning of the winter, when boots are like $300 each. I never, ever buy full price because you know they will be on sale in two months. Value investors are like that, but they sometimes have to wait years for valuations to come down.
Ethical investments, by contrast, are having a stellar period, because they don’t invest in some of the industries that have been having a tough time in the last couple of years, especially mining. And they have more investments in booming industries like healthcare and technology, so it’s happy days for these guys at the moment. (Click here if you want to know more about that).
All of this stuff is swings and roundabouts though. Just like I am set up perfectly for a world where big butts are in fashion, I am going to be sad when big boobs come back in vogue. And they will.
Why pay more?
The other thing about these funds is that they have different fee levels. ‘Active management’ is much more time-intensive and therefore more exy on fees. ‘Passive management’ is where they basically just follow the market – these are generally called ‘Index Funds’ and they have lower fees.
It’s like the difference between going to the hairdresser to get foils and complicated layers every six weeks, versus having your natural colour and a trim at Just Cuts.
Active managers would argue, as would my hairdresser, that you get what you pay for.
I pay a premium to my hairdresser and my fund manager, because I think both are worth it. My hair is frizzy and mouse-brown and needs a lot of help. I pay for ethical investments, because I am a greenie, leftie tragic. That’s totally my choice.
You could easily get a low-cost, Index fund or an ETF that will do the job of helping you grow your wealth. You can also get a thoughtfully selected range of managed funds that will help meet your goals and possibly perform better than competitors (known as ‘outperforming the benchmark’).
So what’s a girl to do?
Well, you have a range of options.
Warren Buffett (one of the world’s richest men) reckons everyone should just do the Index Fund thing. Who am I to argue? If you want to, check out MoneySmart’s info on choosing a managed fund, and it talks about them in more detail.
ETFs (Exchange Traded Funds) are very much in fashion, and are another low-cost way to access investments via the stock exchange. I have exposure to some through the Acorns app, (which I’ve talked about here, towards the end of the post), but it’s not a large amount. That’s one of the good things about ETFs – you can start small. MoneySmart also has some good info on this.
Speak to a financial adviser. I know, you are all like ‘no, I can’t afford it’. I am generally a fan of investing in professional advice from people who know more than me (hello, divorce lawyer fees). However, I do think you need a good BS filter as well, because advisers do generally want to make money out of you. Start at the FPA if you want to find one, as their members have to be highly qualified.
If you don’t trust a financial adviser in a suit, consider getting some robo-advice. Which is not as fun as it sounds, because it’s not like Dexter on Perfect Match. (If you don’t know who that is, either you’re too young, or I’m too old). It’s basically digital advice from companies such as Stockspot (I am not advocating them, it’s just an example).
Now, if you aren’t sure why you’d want to buy shares at all, that’s a different conversation and you should probably read this post. Simply put, shares can be a good way to start building your wealth if you can’t afford a property and are pissed off at getting 2.5% interest from the bank.
Just don’t feel bamboozled by all the different managed fund options. Start small and simple, get comfortable, do a bit of Googling and reading, and I swear, you will be rich enough to buy an 80s robot in no time.
*Bonus learning – If you are interested in why assets are overpriced, it’s because of monetary policy (see this post for a primer). Interest rates are low, so everyone has more money to spend on buying investments. Also, because interest rates are low, it’s not much use sticking cash in the bank, so people buy shares and bonds and buildings to get a higher return. But when everyone does that, prices go up. It’s a tricky balance.
Photo credit: Kevin Jarrett