Let’s assume you’ve been following the Fierce Girl principles, and now you have squirreled away a nice lump sum. Maybe it’s $1000, maybe $5000 (you go girl!).
Now you want to put it to work, as it’s part of a long-term goal. (If it’s for a holiday or something in the next year or two, you can stop reading now and leave it in the bank.)
But if it’s for your F*ck-off Fund, a home deposit or for general unspecified future uses, you might want to invest it. Or you might not. Totally up to you. You don’t go around telling me how to live my life (unless you’re my mum, who provides ‘guidance’ on key issues like not ‘burning the candle at both ends’ and wearing singlets).
So I won’t tell you what to do with your money. Partly because that’s kind of illegal, since I am not a financial adviser. Mostly, though, because it’s a personal decision.
However, you still want to know some of the options. But let me make a couple of important points about investing – at any level, from novice to bad-arse billionaire.
1) Only time will tell you whether you made the right decision and 2) Nobody has the secret answer (except Biff, the bad guy in Back to the Future II, who has the Sports Almanac and can bet on everything ahead of time).
If you’re not Biff, then, like the rest of us, you’re making your best guess based on the information you have at the time. Even the rich guys in suits running the finance world – are basically doing that.
Their advantage is the quality of their information – they know a shitload about the thing they invest in.
But they don’t know if China’s economy is set to stop growing, or what would happen if Trump won the election, or whether there’s a huge meteor about the hit the earth and snuff out humanity. (If it’s the latter, I hope it’s about the same time as the Trump victory.)
The upshot of all this is that I want to give you some options, but encourage you to make a decision that suits you, your goals, personality and lifestyle.
Risk and return
Advisers often talk about ‘risk tolerance’, and get you to do a quiz about it. It’s way less fun than a Buzzfeed quiz like “What Sexy Halloween Costume Should You Wear Based On Your Favorite Food?” (actual quiz, yo!).
But it’s useful to know how much risk can you handle and still sleep at night, and how much can you afford to lose if it all goes pear-shaped.
There is a general concept that more risk brings more reward in investing (aka the risk-reward premium). That’s a vast simplification, but it does explain why you earn bugger-all on bank interest and generally more on shares.
Below are a few options (by no means the ONLY options) that you might want to look into, ask smart people about and generally educate yourself on. Most of them are focused on shares, or things can be traded on the sharemarket, because:
- that’s where you can boost returns in an easily accessible way.
- they work well when you have a small amount,
- you don’t need to borrow to buy them, and
- you can sell them at any time (unlike a property, for example).
Option 1. Leave it in the bank. A very smart friend of mine, who works in finance, is convinced this is the best option at the moment. Everything is expensive. Central banks have run out of ways to pump up their economies. It’s tough to get a good return. In her words, “The risk premium doesn’t justify the return”, if you invest in shares and the like.
Pros: A bank account is a safe bet. Deposits are guaranteed by the government.
Cons: Your money grows by receiving interest (and not much), not capital growth. i.e. the underlying value of it doesn’t go up, as it could for something like a property or shares.
If you do take this option, be sure to find the absolute best interest rate by comparing accounts on a site like Mozo or Finder. Term deposits are useful if you don’t need the money anytime soon – you get a bit more interest by promising the bank they can have it for a certain time. You can still get it back if you need it, but you forfeit some or all of that interest.
Option 2. Buy an ETF – aka an Exchange Traded Fund, which can be bought and sold like shares, through a stockbroker or online trading account. These tend to track an index (which is made up by a number of listed companies), but unlike an actively managed fund (see below), nobody is picking each of the stocks for you, so it’s cheaper in terms of management fees. Indexes track a lot of different types of assets, such as Australian equities, or even something more exotic like global shares, gold bullion or cyber security stocks.
There are lots of ETF providers these days, such as Betashares (disclosure: they are a client of my agency) and Blackrock iShares. My smart friend, mentioned above, picks ETFs as her second choice. I have exposure to them through the Acorns app, which is kind of like a buffet approach, where you have a whole bunch of ETFs, and can start with a really small amount (I kicked off with fifty bucks).
Pros: A good ‘toe in the water’ if you want to become an investor. You don’t have to decide on one company, so your investment becomes more diversified with a range of assets – i.e. all your eggs are not in one basket. ETFs are easy to buy and sell. There are lots to choose from. And you don’t pay a lot for the privilege.
Cons: You are tied to the performance of whichever asset class you have bought. e.g. if you have Aussie equities and they go down, so does your investment (but they also go up too). They can also be a bit confusing as there is so much choice – see an adviser if you aren’t sure. Or consult the oracle of Google and read reviews. And as with any market exposure, the worst case scenario is losing what you invest. That’s unlikely, but it’s not like the ‘sweet dreams’ security of a bank deposit.
How to get going: These are ‘exchange traded’, so you generally need to buy them through a broker – one of the online brokers will do the trick. Acorns is easy – you download the app and link it to your bank account.
Managed Funds – This is the traditional model, where a bunch of smart people pick investments on your behalf, bundle them up and manage them on your behalf. It’s quite similar to ETFs, in that you buy units in a fund and the value goes up or down based on the performance of the underlying assets. The main difference is that most funds are run by people (known as ‘actively managed’). As a result, there is a pretty big spectrum of performance, both good and bad, at different times.
Pros: If you pick a good one, you can make decent money – annual returns of above 30% are possible. Depending on the fund, you can also get more control and visibility over their investments – for example, Australian Ethical’s managed funds are all screened against their ethics charter, so you aren’t accidentally investing in a company that runs detention centres or digs up coal. (Also one of my clients, and I invest with them too).
Cons: You tend to need a bigger chunk of money to get started. If you pick a dog, you can be paying relatively high fees for poor performance. When deciding, you should look at long term (i.e. 3, 5 and 10 years) performance.
How to get going: You can apply straight to the fund (some are even old-school paper forms), or some can be bought on the ASX through a service called m-Fund. Again, you’ll need to use a broker for that.
Listed Investment Companies (LIC’s)
These are very similar to both managed funds and ETFs – you buy shares in a company that is listed on the ASX, and its sole purpose is to buy shares in a lot of other companies. You can learn more about them here.
Pros: These often have lower fees than managed funds, but still have an active stockpicking approach behind them. There are some very reliable and established ones with a solid track record, that can give comfort to the novice investor. I used to work for AFIC, the oldest LIC in Australia, and it has weathered all sorts of storms since 1927 (including the Great Depression) and is still popular.
Cons: As with managed funds, you are exposed to losses if they pick poor performing stocks. While you can trade them on the ASX, some LICs don’t have a lot of people buying and selling each day, so you might not get the price you want at the time you want to sell.
How to get going: Once you have found an LIC that meets your needs, you buy them on the ASX, via a broker.
Self-funding instalments – These are a handy little thing that don’t get a lot of press, but can be a good way to boost your earnings by borrowing. Another smart friend of mine said she started her portfolio with these, way back when, and it was a great way to make money over 5-6 years without too much risk.
They are available on offer for a few blue-chip stocks (which tend to be the safest type of direct share investment), such as Westpac. They work like this: say you put up your $1,000, the SFI will match your investment (ie. you get $2,000 worth of shares). Then when the shares pay dividends , instead of you getting the money in your pocket, it goes towards paying down the loan amount.
Pros: You returns that are higher than what you money would get in the bank. It’s an easy way to dip your toe in the water. You can trade the SFI like any other share.
Cons: It is a long-term investment. You are still reliant on the performance of the underlying share and its ability to pay dividends. Borrowing to invest can magnify your gains but also your losses.
How to get going: these are exchange-traded, so you would buy them through an online broker.
Direct Shares – This is basically saying ‘I’ll have five hundred bucks of Company X shares please’ and own them in your own name. The only cost is the broker you have to use to buy them.
My view is: if you know what goes into deciding what makes a company a good one to buy, at a good price, you’d realise why so many people pay others to do it. I have done the basics of company valuation and it’s hard and scary and full of maths. And then there is the research about the company’s business model and strategy, where it sits in the industry, its competitive position etc. It’s a tough gig, and I prefer to leave it to the experts.
Pros: no management fees, buy whatever you like and exclude what you don’t.
Cons: Unless you’re an analyst or read analyst reports, there’s a good chance you’ll pay too much for the shares, or buy shares that don’t meet your needs for capital growth or income. It’s also hard to diversify (i.e. spread your risk) with a small amount of money.
New, fancy, fintechs
There are some newer investment options such as peer-to-peer platforms. Brickx, for example, lets you buy a small share of a residential property. I neither condone nor advocate these – you need to make up your own mind and/or wait to see how they perform. I mention them here to make the point that there are new ideas and ways to invest emerging all the time.
Well if you made it this far, well done. I would say the key is to do your own research and do what makes sense to you. If you are a bit scared, just start small. But don’t feel like investing is too hard or complicated – there are lots of tools and products out there to make it totally do-able.