Haha sorry about the clickbaity title. But it’s kind of true. These two things may just help you get past your fear and lack of confidence about investing.
You see, there are a lot of vested interests who like to make investment seem haaaard and scary and complex. (So you pay them to do it for you, ya see?).
But it doesn’t have to be that hard, I swear. So, here I offer you two truth-bombs to consider.
1. It’s all about the big picture, not the details.
There’s an investment concept called ‘asset allocation’, and before you hit the snooze button, let me explain why it’s important. It refers to the big ol’ mix of investments you have, like a recipe.
A bit of property here, some shares there, here’s a parcel of bonds, and here’s a pinch of alternatives!
Each ‘asset class’ has its pros and cons, and when you mix them all together you get a delicious mixed fruit cake. (psych! fruit cake isn’t delicious at all).
People selling you investment products will often tell you theirs is the best. Performance this, fees that. But you know what’s more important than the separate ingredients? The recipe you start with.
(Actually that assertion is a hotly contested debate in the industry, on a par with the great Kimye vs T Swift battle).
Broadly speaking though, having a good, diversified mix of investments is pretty damn effective for building wealth. The recipe should be matched to your goals and timeframe.
When you go to a robo-advice service like Six Park or Stockspot, they are helping you choose the right recipe for you. They’ll also help with the ingredients, of course, through ETFs and Index funds (more on that below). So robo-advice can be a good (low-cost) way to get your head around the whole shebang.
The takeout: Don’t worry about finding the ‘perfect’ fund manager or picking the ‘hot’ stocks. Just make sure you have the right mix of investment types (i.e. asset classes) to meet your goals.
2. Investors do stupid things … all the time.
That’s why markets are so choppy. At the moment, some of the most valuable stocks on the ASX are trading way beyond their intrinsic value. Take Afterpay – the favourite frenemy of the cash-strapped millennial shopper.
It’s currently overpriced because investors are piling into it in a frenzy.
The stock is currently trading at an astronomical high – a Price Earnings (PE) ratio of over 180 forecast earnings. You don’t need to know what a PE ratio is, you just need to know that even hot-tech-fave Google only has a PE of around 20.
Basically this stock is as popular as a fidget spinner in the playgrounds of 2017 (and personally, I think it’s heading for the same fate).
Markets boom and they bust. Particular stocks are in fashion, then they aren’t. Investors get caught up in ‘irrational exuberance’, and pile into the same companies, based on a good feeling and some comforting projections in an Excel sheet.
When a professional investment manager does this, it’s called ‘active management’, and they charge handsomely for it. Unfortunately, they aren’t always worth the money.
But you can avoid these professionals and their big bets by just ‘tracking the index’. You see, there’s an alternative to active and it’s called – surprisingly – passive!
Rather than picking particular investments, you just follow the market. The passive-vs-active debate is a long-standing one and I’m not here to adjudicate. (Unlike Kim vs Taytay, where I am team Taylor to the death).
I will say, this week the New York Times published a piece (which I stumbled across today – after I’d planned this post), where the author opines:
“I had accepted the imperfect choices and high fees imposed by so-called active mutual funds, and I had compounded those liabilities by buying and selling at the wrong times.
“The Dalbar data leads to the inescapable conclusion that most investors, this one included, are bunglers: We panic and exult at the wrong moments, impairing our chances of success.”
He goes on to conclude:
“Most people, including me, would be better off if we gave up on being smart and stuck with a simple approach: long-term holdings of diversified, low-cost index funds, using only money we can afford to tie up for years.”
So if you are wondering how to get in on this passive investing gig, you could do worse than read my aptly titled post ‘WTF is an ETF‘, or check out Canstar here. If you want to dip your toe in the water, I like Raiz, because you can invest a small amount.