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The Fierce Girl's Guide to Finance

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Why investing is just like wearing false eyelashes: the pep talk you’ve been waiting for

A long time ago I bought a variety box from Sephora that came with a set of Huda Beauty false eyelashes.  I often looked wistfully at this wonderful creation.

If only I were that kind of woman. You know, the type who can skilfully apply false lashes and breeze out into the night.

Well dear reader, it turns out I am.

My friend Amara provided encouragement and coaching. I watched Huda herself apply them in an Instagram video. She made it look not that hard.

And so, with a wedding to attend, I figured it was now or never.

First attempt was clumsy. They seemed huge, I could feel them attached to my eyelids, and they obscured my vision slightly.

But by the end of the night, having consumed at least an entire bottle of champagne and taken about 347 selfies, I was telling anyone who’d listen that they had become part of me.

‘I’m actually a cyborg now: part human, part eyelash’. You’re dead right, I am an entertaining wedding guest.

Wedding Selfie no. 243

So anyway, I pulled them out again for Cup Day, because well, why not look good if work is paying for your lunch and booze?

Cup Day selfie no. 67 – please note my crown

This time it was much easier; they stayed in place easily and I quickly activated cyborg mode.

Then this week, I lashed up for a Fierce Girl photo shoot (more to come on this). By now, I managed to do it no-stress, first time and at 6am. Kim Kardashian, eat your heart out.

The reason I am telling you this otherwise tedious story, is that it proves a point about life, cosmetics and investing.

I had previously approached the issue with a lack of confidence. I was overawed. “I’m not the type of person who does that”, I told myself.

But I’ve almost mastered it now, thanks to gentle encouragement, online research and a first attempt that felt, frankly, clumsy and uncomfortable.

I also chose a quality, trusted brand. (Surprisingly, the $3 ones from Daiso are vastly inferior to the $40 ones from Sephora. Who knew?)

If you’ve thought about investing, but been overwhelmed by it, you should take heart from this story. And the next one.

I met a bloke at the ASX Investor Conference in Brisbane last week. I call him a ‘bloke’ because that’s what he is: a salt-of-the-earth fellow with a broad Queensland accent.

If this were a meme, the conversation would go:

Nobody:

Absolutely nobody:

Queensland bloke: You know what, I’ve made an average of 7% a year since 1999 by investing in shares.

Consider: if old mate had invested $10,000 back when Britney was singing Hit Me Baby One More Time, then added another $500 per month, he’d have made up to $285,000 by now. (That’s an estimate only and doesn’t allow for the sequencing of returns, but you get the picture).

If he does the same for the next 10 years, it could jump to over $600,000, thanks to the magic of compound interest. As the Backstreet Boys said in 1999, I Want it That Way.

 

Oh baby, baby, how was I s’posed to know that I should have been investing in 1999, instead of drinking cheap wine and flirting with boys?

Following this unsolicited disclosure, I asked my new friend some questions. He holds about 25 stocks at one time (pretty standard). He picks them based on broker reports, media articles and a good old dose of gut instinct. His best performing pick was Blackmores – bought in at $10 and it’s now over $200 per share. Part of his rationale? He saw the products in the pharmacy and knew the brand.

He also picked some dogs, like Slater & Gordon, where he threw good money after bad. (Nothing about investing in a law firm sounds attractive to me, but … each to their own.)

He lost a lot in the GFC, but hung in there and the portfolio recovered over time.

And that, my friends, is how you make money in equities.

I’m here to tell you, if old mate Queenslander who lived on a farm for twenty years can do it, you can too.

There are different ways to access listed investments. A fund manager can do it for you, you can buy a low-cost ETF, a roboadvice provider can hook you up, or you can just choose them yourself. I’ve written a whole post about it here.

The overarching message is this: anyone – including you – can build their wealth through listed investments. You need some baseline knowledge, a willingness to try and a good deal of patience.

You can always start small – exchange-traded products don’t have a minimum investment. (Well, technically buying one unit is the minimum).

Of course you need to be mindful of risk and time horizons. A rule of thumb is that shares suit investors who have at least a five-year time horizon. That allows the ups and downs to balance out over time.

And diversification is important. Old mate had actually lost money on the property he owned (it was in the country) so was happy he had his wealth spread across different asset classes.

Long story short, if I can nail false eyelashes, you can totally nail the stockmarket.

Investing 101 – Explained in shoes. Because, why not?

There is one important things that bad-arse, grown-up ladies do with their money.

And no, it’s not buy designer handbags.

Ok  maybe some do – but that’s not what this post is about.

No, what really grown-up ladies do is invest their money. Don’t be put off by that word ‘invest’.

You don’t need a finance degree to invest.

You can get someone to do it for you if you like.

Just like you don’t need to be a colourist to get your hair coloured, you don’t need to be a finance expert to invest.

You may want the guidance or input of a financial adviser. But you can also get a feel for it by starting small and being smart.

What sort of investments?

Well there are lots of ‘asset classes’, but the most popular ones in Australia are shares, property and cash. They all have different pros and cons, so I like to explain them like a shoe wardrobe.

Cash: your work flats – Not very exciting, and not much benefit to your outfit, but geez they are comfy and reliable. Especially if you have to hike to a meeting at the other end of town.

Similarly, putting cash in the bank has a low return, but you know you’ll get all of it back at any time.

Now, I don’t believe you should go to important meetings in flats. And so with cash, it’s fine for some purposes, but it’s not an ideal long-term play because of two reasons:

1) Opportunity cost – the longer you have it in the bank getting stuff-all interest, the more you miss out on the sweet gainz you could be getting in something like shares or property. There is also no way to reduce the tax you pay on any interest, so you pay your marginal rate (i.e the same as your income tax).

2) Inflation risk – as inflation rises, the buying power of your money decreases. If you are getting 2% in the bank, and inflation is 2.5%, then you effectively lose money, because it’s worth less than before.  (I have a whole post on this if you’re interested – here)

Now, if you’re really committed to cash because you’re risk averse or don’t quite know when you’ll want your money back, there is a subset of cash called Enhanced Cash (or similar names).

It tends to give you a couple of percentage points higher than a bank deposit, but is still pretty safe. Think of it as a strappy summer flat – a bit more pizzazz but no real risk of limping home in bare feet, with the balls of your feet burning.

One example is Smarter Money Investments, which I name here because I know the guy who runs it – he is a massive nerd and gets great returns (and for full disclosure, my employer owns some of it). There are other products out there which you could consider from a range of fund managers.

These products aren’t exactly the same as putting cash in the bank, but they are low on the risk spectrum. Make sure you read the fine print.

PropertyYour winter boots – If your boot wardrobe is anything like mine (extensive and carefully curated) then you’d know there are hits and misses. I have faves that have done the hard yards and been a damn great buy.

One of my fave buys

Then there are ones like the blue velvet over-the-knee pair. They were on sale, I had to own them, but now I can’t find anything to wear with them. In investing, this is called ‘poor asset selection’.

Buying investment property is really dependent on how well you choose. Unlike the velvet boot purchase, your property choice should be carefully researched, highly rational and based on solid data sources.

Despite what people say, not all property goes up in value, all the time. It is true that property has been the best-performing asset class in the last couple of decades, but that is an average.

Some locations or house types languish, or even go down. So while property can be a great way to build wealth, it needs more than a good knowledge of colour swatches and Ikea assembly.

The latest Russell Investments report looking at historical returns, warns that even though residential property is the best performer on average, “there was wide variation between regions, dwelling types and suburbs, with some areas declining”.

This is a risk of single-asset investing – imagine if every time you went out, all you had were those blue velvet boots!

So, just be really well-prepared if you go down this road.  And if you don’t want to go it alone, you have a couple of choices.

  1. Real Estate Investment Trusts (REITs) – these are a collection of properties parcelled together, and you  buy ‘units’ of them on the ASX, a bit like you buy shares. The value of the units can go up and down depending on the market (and  don’t always reflect what’s happening in the rest of the property sector. They got hammered in the GFC, for example).

    However, they give you a different flavour to traditional shares (aka equities) and the cost of entry is lower than stumping up for a house or apartment. They also give you access to more than just residential property – so you can own offices, warehouses and other commercial buildings. This provides diversification.

  2. Work with a professional property adviser – Someone like Anna Porter, who is a Fierce Girl-style powerhouse, if you ever get to see her speak. Her company does all the research and then advises on which property to buy. There are lots of similar advisers out there – but make sure they are independent and not just trying to spruik an overpriced new development.

 

Overall, Aussies love property investment and aren’t going to stop any time soon.

But I will just say this: don’t assume that just because you live in a house, you know how to invest in one.

It requires skill, knowledge and yes – luck – to get right.

Shares – your fancy, going-out-to-dinner heels. They give you great rewards (you feel so sexy) but they also have more risks – from tripping over, through to searing pain in your foot.

Shares have historically given great returns. (Nice chart on that here). But they do it with more volatility.

If you happen to put money in just before some stock market craziness, then, yeah you’ll lose some of it quicker than a Bachelor contestant loses her shit at a rose ceremony.

But, just like the resilient young ladies of The Bachelor, you’ll get back up and repair your losses over time. You need time and patience though – if you lack either of those, you could turn the ‘on paper’ loss into a real loss.

That said, there is a lot to like about shares. Not only are they strong performers in terms of returns, they are liquid (i.e. you can usually sell them way faster than a house). You can buy just a few and pay nothing more than a brokerage fee for the privilege, whereas property needs a big upfront investment and has quite a few of costs, from stamp duty through to legal fees.

I’ve written more about shares in this delightfully named piece: Buying shares is pretty much like choosing a husband.

Which investment has the best returns?

You know I’m not going to give you an easy answer.

The thing to remember with any investment is that when people (i.e. the media, finance types, blokes in pubs) talk about returns, they are often talking about that whole asset class.

The Russell Investments report shows that:

Australian shares returned 4.3%, before tax, in the ten years to Dec 2016. But that’s the market average. You may have bought some shares that went bananas and made 20%. Or you bought some that tanked and you barely broke even.

Ideally, neither of these things happened, because you had a diverse portfolio  where the winners and losers balance each other out.

You can do this by investing in managed funds, listed investment companies or exchange-traded funds. (More on that here).

Residential property returned 8.1%, before tax, in the 10 years to Dec 2016. Yeah, almost double the return of shares. But that’s a helicopter view. There are people who made way more than that because they picked a lucky location; then some people in places like Perth and Mackay who watched their properties fall 20% or more in value.

There are also more asset classes than what’s discussed here (alternatives, international shares, fixed income etc). I have just focused on the most popular.

Then there is tax. And it’s complicated.

Broadly speaking, property investing can be good for people who have a high tax bill, as they can declare a loss and claim it as a tax deduction (the oft-discussed ‘negative gearing’).

And for people who pay low or no income tax, Aussie shares can be great because of dividend imputation (aka franking credits). Now I won’t explain these, because working them out literally made me cry in my finance degree. But the outcome is, the less tax you pay, the more you get a bonus return on top. (If you’re interested, I co-wrote this article on the topic).

Of course, you should discuss these tax-type things with an accountant or financial adviser. My main point is that looking at a headline return isn’t very accurate – it depends on your costs, tax rate and timing.

You can start small

Despite all these caveats and warnings, the message I want to give you is this: investing is a key part of building wealth (remember the Four Best Friends Who Will Make You Rich?). Letting your cash sit in the bank forever or spending it whenever you get it, won’t get you closer to your ideal lifestyle.

The more you learn about it now, and the earlier you start, the more you could make over time.

Don’t be afraid to start small. I’ve been running a little portfolio on Acorns, and it’s doing well. Even popping $500 into a managed fund or listed investment company can be a good start.

That’s the key though: you need to start somewhere.

And if all this seems like a lot of information, that’s fine too. It’s totally ok to ask for help. Talk to an adviser, or a trusted friend or family member. You don’t have to be an expert to be an investor.

Photo credits:
M.P.N.texan Good Shoes via photopin (license)
https://www.flickr.com/photos/reverses/
https://www.flickr.com/photos/simpleskye/

3 money lessons I’d give my 21-year-old self

My first degree was Arts, with Honours in English literature. If you want to know about Latin declensions or 19th century novelists, I’m your girl.

I don’t tell you this to impress you (although, feel free to be impressed), but to give you the context of how financially literate I was when I started my career. I even dropped maths in Year 12!

Now, I’m about to finish the final exam in an Applied Finance course. It’s not a full degree or anything crazy like that, but it’s the pathway to becoming a financial analyst (which I don’t intend to do).

In the 16 years between my first graduation and my imminent second one, I’ve muddled along on my own. I’ve learnt from smart clients and bosses, and the great Tom Buchan hounded me into loving economics. But I am not a numbers person, I don’t love maths and I can’t split a bill to save to myself.

Yet here I am, talking about money and stuff.

If I can do it, anybody can. However, there are things I wish I’d known earlier. If I sat my 21-year-old self down, this is what I’d say.

Capital Growth + Income = Returns. Think about all your savings in this way. Capital growth is when your asset increases in value without you doing anything to it. Your house’s value goes up while you live in it, or your shares increase in price while you own them.

Income is what you receive along the way. Think rent on an investment property, interest on a savings account or dividends on shares.

Every investment or asset will have some or all of these ingredients, e.g:

  • The house you buy to live in receives no income, but it gets capital growth.
  • A bluechip share portfolio will usually have a bit of each but skews towards income (more about that here).
  • A savings account has no capital growth but will pay income from interest.

There is no perfect combination of growth and income; it’s like lipstick. One that’s super glossy and glides on beautifully won’t stay on past your morning coffee. You can get one that makes it well past lunch, but it dries your lips out like a desert. Every lipstick has some combination of shine and durability, but the perfect ratio doesn’t exist.

Generally, the younger you are, the more you look for ‘growth’ assets because you’re building your wealth. When you’re retired, you generally need more income because you don’t have a paypacket. There are a hundred different scenarios in between, so you need to decide what’s important to you.

Every dollar you spend is a dollar you can’t make money from. The thing about money is that it can make you more money. Buying a house, investing in shares, contributing to super, even just getting interest on a bank account: all of those things give you more money – FREE money! Because that’s what capital growth and income are: money you DIDN’T HAVE TO EARN by working.

So, while it feels good to drop 100 bucks on eyelash extensions (don’t get me started on the ridiculousness of that price point), that’s money you could have put towards a holiday, or a home, or a degree, or any number of things that will actually improve your life.

If you can look me in the eye and convince me that extensions have genuinely improved your life (better job? hotter man? happier heart?) then go ahead. For example, I genuinely, deeply believe being blonde is an expensive but essential part of my life. But that means I don’t do other things like spray tans or nail salons.

It’s part of my approach to mindful spending and while it’s not perfect, it means I have some money leftover to do other, more productive stuff.

Get to know your money personality – and manage it. Everyone has their own approach to finances . I’m the ‘going broke saving money’ type: I can’t go past a sale … but still buy stuff I don’t need. (And, of course, it’s not a bargain if you don’t need it).

The key is to identify your own quirks and work around them (e.g. I try to avoid shopping malls in January). It’s all about self-awareness.

In a partnership, it’s more complicated. I was often in a tug-of-war with my ex-husband because we had different ideas about our money. He spent far more on ‘stuff’ than I’d like; I spent more on travel than he wanted. Neither of us was right or wrong, but if I had my time again, I would keep more money separate, accept that we have different priorities, and work from that basis.

Nobody is perfect, and I’m certainly not . I still get mad at myself for breaking my own budgets. I am the worst at claiming back money from my health fund and the tax office. I never have all of my shit together, all at once.

But like most hard things, doing a little bit to improve, all the time, can have a big impact.

Do you know some Fierce Girls who could use this advice? Share this post! Or subscribe if you want more real talk and lipstick analogies.

An Insider’s Guide to Finance: the risk-reward relationship

I’ve taken plenty of risks in my life. Some were productive, like packing up and moving to London. Leaving my marriage was a big risk that was hard to take, but the right thing to do. Wearing neon patterned tights with a crushed velvet skirt to a mufti day in year 7 – that risk did NOT pay off in either social or fashion terms.

When it comes to money, you need to get comfortable with risk. You see, there is a thing called the risk-reward premium, which means the higher the risk, the higher the (potential) reward.

This also means you can put a price on risk – the riskier the deal, the higher the stakes.

It’s why a car loan has a much lower interest rate than a credit card. The car can be repossessed if you can’t pay back the loan, while the credit card is ‘unsecured’ – they can’t come after you for the delicious cocktails you just bought, and the bank manager won’t fit into that Kookai dress. So the risk is higher for bank and more expensive for you.

Risky Business?

Now I am not saying let’s go to Vegas and put it all on black.

But when you invest, you want to balance the risk within your portfolio and within the asset class so that you get a good return while not losing your money.

Ok wait, I just dropped some jargon there. Let’s break it down.

Your portfolio is your entire wardrobe.

Your asset classes are each section: shoes, dresses, underwear, activewear, etc.

We talk about being ‘underweight’ or ‘overweight’ certain types of investments. For example, when the banks aren’t performing well, you might sell off some of those stocks and become underweight in banks. Or if you think resources are about to get hot again, you buy more and go overweight.

This can apply within one asset class – so you can be overweight on running shoes and underweight on high heels, within the broad ‘footwear’ asset class.

Or it can apply to the broader asset classes, so you have heaps of activewear, but not much in the way of work clothes (yep, me). That would be like having a lot of property (your own home) but only a small parcel of shares.

So now we have the lingo, let’s talk about risk. Here’s what you need to know:

1. You need some risk in order to make money, and that’s ok.

2. You can manage that risk by spreading it around – aka diversification

Now let’s talk more about that.

Why risk is ok.

Risk is what makes you money. It’s the old adage of ‘nothing ventured, nothing gained’. So it’s safe to keep your money in a term deposit in bank, but that’s not going to make you money.

In fact you could even lose money in the bank.

Wait, what?

Thing is, there are heaps of different risks when it comes to money, and one of them is inflation risk. You know how a bag of lollies used to cost 20 cents when you were a kid, and it’s $2 now? That’s inflation.

The value of money changes over time (it’s a really complicated backstory as to why), but let’s just say, inflation usually runs around 2-3% per year. (It’s lower than that right now, but has often been 5-6% in the past 30 years).

If your money is in the bank getting 2% interest, and inflation is 2%, you aren’t making money, but you’re breaking even. But if inflation goes up to 2.5%, you’re actually losing money. The dollar you put in buys less than what it bought a year ago.

This makes intuitive sense right? Things cost more all the time.

So that’s called Inflation Risk, and it’s a risk you face even when you think you’re not facing a risk. Crazy huh.

Here are some other fun and friendly risks:

Interest Rate Risk – The risk that interest rates will change and affect your investment. For example, you buy a property at 5% interest from the bank and then interest rates go up. Suddenly, the $2000 a month mortgage that was covered by rent becomes $2200. Not only do you have to find more cash, it changes the yield – i.e. the return you’re getting for the money you spend.

Liquidity Risk – The risk that you might not be able to turn your investment into cash as quickly as you need to. In the example above, you decide to sell the house as you can’t cover the repayments. But a bunch of other people have been hit by rate rises and are selling too. And with home loans more expensive, the number of buyers falls. So you might have the house on the market for several months, even drop the price. The property investment has low ‘liquidity’ and it can cause all sorts of headaches.

Market Risk – You can be the best stock picker in the world – or pay the best stock picker – but if the whole market falls, it’s pretty likely your investments will fall too. Economies – and the markets they’re part of – are always cyclical. They go up and down – that’s as much a part of life as the fact that you’ll get your period on the exact day you don’t want it to come.  The trick is to be prepared for the cycle and have diversified your risks – that way you can manage the dips when they come.

This is just a short list to give you a flavour. There are plenty more, like

  • sequencing risk (the risk that your investments are in the toilet right at the time you need them);
  • credit risk (the risk that the company you lent money to – in the form of bonds – goes under and doesn’t pay you back);
  • operational risk (the risk that you invested in a company run by morons who bugger it up and lose your money); and
  • concentration risk (the risk that you put all your eggs in one investment basket and then drop the whole darn basket).

You can make friends with risk

I’m not trying to scare you though. You don’t avoid investing just because there are some risks. If I listened to my mum about all the risks of going on holidays to the US (being shot, getting raped, the plane crashing, the car crashing…) then I’d never go.

What you do is manage risk, by being clear about your time horizons and your goals. (A financial adviser can totally help you there).

The rule of thumb is that you only invest in shares if you have at least a five-year horizon, because that’s how long you need to smooth out their ups and down (technically called volatility).

An investment property generally needs even longer because of the costs and drama associated with buying and selling.

And with your superannuation, you have 30-40 years to smooth out the returns, so if you’re young (under 45 or so) then you can tolerate even more risk in the hope of getting higher returns.

Spreading the risk is crucial. The ideal (possibly over your lifetime) is to have a bit of everything. Not just a property, not just shares, not just a term deposit, not just bonds. A bit of everything.

But you can start small. For example, think about a managed fund or ETF if you already own your home. Think about buying listed property instruments (REITS) if you already have shares but can’t afford an investment property.

Basically, don’t just buy a bunch of super cute high heels but then never have any good flats you can walk in.

Risk in a nutshell

So here are the takeaways you should know about risk:

Risk is a part of life, and investing. But if you stay away from crazy, get-rich-quick, too-good-to-be-true investments, you can tolerate and manage risk effectively.

There is also risk in doing nothing. Letting your money sit there and track inflation is a risk, because you risk your future returns and wealth.

So don’t be scared of risk – because the other side of it is reward. Imagine if you never took the risk of drinking too much, wearing too little and partying too hard – what fun stories would you have to remember? Investing is just like that, but with less booze.

Photo credit: Aaron Perkins

 

I saved some money. How do I invest it? (And WTF is an ETF?)

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.

PS: I’m not an adviser, this is not advice, please do your own research and/or see an adviser before you hand over your cashola.

photo credit: Jeff Belmonte Contando Dinheiro via photopin (license)

An insider’s guide to finance: Managed Funds

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).

If only we could get advice from adorable 80s robots
If only we could get advice from adorable 80s robots

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

Buying shares is pretty much like choosing a husband

For realz. But I’ll get to that.

First up though, why are we talking about shares? Because they can be a solid way to build wealth. And they can be another option if you are priced out of the property market.

However, the stockmarket has been given a bit of a bad rap over the years. Partly because of the dudes who run it. People think they’re like this:

Well, I work with a lot of them and can assure you most of them are way more nerdy. They’re much more likely to ‘slave over a spreadsheet’ than ‘snort coke off a hooker’.

And maybe you think people who play the stockmarket are super-rich, like Goldie Hawn in Overboard (oh, what an 80’s classic!):

Well, go down to any company AGM (a shareholder meeting) and check out the crowd. It’s like this:

There are two types of shareholders. The first is mainly white guys in suits (‘institutional investors’). They invest on behalf of super funds and the like, and don’t go to AGMs because they have private meetings with CEOs in boardrooms with tiny bottles of San Pelegrino.

The other shareholders (‘retail investors’) are normal people like us. A fair few are older people who come to AGMs for the free sandwiches – and because they rely on shares for retirement income.

“But enough random photos, tell us more about shares!” I hear you say. Well, as R. Kelly once said, let me break it down for ya.

“Stocks, shares, equities: what are they?” 

These are all the same thing and they mean you have bought a piece of a company. You are a part-owner of it. You share the risk and the reward. If the value of the company increases, the share price goes up. If it makes a profit, it gives some of it to you. If it goes bust, so does your money.

Types of shares:

Bluechip – this is not an actual technical term. It’s just a way that people refer to big, reliable companies like banks or miners. (Note: being big isn’t a guarantee of reliability. It’s like, you can buy a pair of Jimmy Choo’s and be confident in their quality – but that stiletto heel can still get caught in a crack and snap off.)

These shares are the premium end of the market – you’ll pay more for them, because they are less risky. Buying bluechips is like marrying a guy in his 40s who already has a house and a career . He has done the hard yards and proven he is an adult. But you pay a price – emotional baggage and a bitchy ex-wife.

Bluechips also tend to pay more in dividends but have less capital growth – explained below.

Large cap, small cap – This is short for ‘large capitalisation’, and is the sharemarket value of the company. Each share is worth a certain amount, and there are a certain number of shares out there. When you multiply these, it gives you the ‘market cap’. (Company A has 1000 shares each valued at $1, so its market cap is $1000.) There are also ‘small cap’ and ‘micro cap’ stocks, which are often bought based on their growth potential rather than how they are doing now.

A company’s ‘market cap’  hopefully grows over time, as its profit, size and share price increase. It’s possible to buy a ‘small cap’ stock that becomes a ‘large cap’ years later.  This is like marrying a 28-year-old guy working on a start-up – a decade later you might be living in a waterfront mansion, or struggling to pay for childcare because you’ve become the breadwinner. It’s a bet on the future.

Bottom line: A good share portfolio will often have a mix of large and small companies because they each have their pros and cons.

“Ok, got it. But what will shares actually give me?” 

1) Dividends 

Because you are an owner of the company, management might decide to give you a share of the profits. These are dividends. Management decides how much they will pay each year, once they have run all the numbers.

This is what those retirees at the AGM are looking for, as dividends replace their pay cheques. However, the company might not make a profit. Or it needs to invest the profit into paying off debts. So they don’t pay you anything.

That’s because dividends are ‘discretionary’. A company never has to pay them.

You can choose companies that are really bloody likely to pay them, like a big bank. Overall though, income from shares tends to go up and down, so if you rely on them for your lifestyle, you generally need other assets like fixed-income bonds or term deposits as well.

2) Capital Growth

This is where the big gains can be made. If you had bought shares in Apple back in 1980 – when Steve Jobs was just another nerd in a turtleneck – you would have paid fifty cents each. They are now $110 each. Even allowing for inflation (i.e. things used to cost less – remember when a mixed bag of lollies was 20 cents?), that is still a damn good deal.

Of course, for every Apple there’s another five companies that either fell over, stumbled along or just ran a steady marathon. It’s all about picking the right stocks. Is that 28 year old boyfriend going to make good money, be a caring father, not get a beer gut and stay faithful?

Nobody knows. Even Beyonce. She won on the first three but failed on the last one. That’s exactly the same as picking stocks. The good thing is, you can have as many stocks as you like, whereas society says we can only pick one husband at a time. (Whatevs).

Total shareholder return (TSR) is what you get when you add these together. Often you can choose to keep reinvesting the dividends you get paid (if you don’t want the income), so that boosts your shareholding value. Couple that with capital growth, and that’s your return.

The TSR is based on many factors, including the company’s performance and share price. For example, ANZ Bank has delivered 7.5% TSR on average over the last eight years, while Westpac has delivered 11.5%. Luck, skill and research, basically.

“Shares sound great! Sign me up! Take my money!”

Whoa there sister. Let’s just bear in mind a couple of things about shares.

They are volatile (compared to cash, bonds or property). Their price can go up and down in one day (and usually does). A bit of ‘vol’ (as we like to call it, because we sound cool and smart) is okay over the long-run, but it does mean you need to be flexible. If you want to spend the $5000 in your share portfolio, you can easily sell them. But is the price good that day, week or month? This is why shares are better over at least a five-year time horizon.

All shares are not created equal. Some are dogs. For example, if you bought Myer shares in 2009 for about $3.60 they’d be worth about $1.30 now. I suspect these shares were bought by men who hate shopping, because if any of them had set foot in a Myer they would know the service is shit, the stores are tired and the prices are ‘meh’.

But if you had bought JB HiFi at the same time, for $9.50, you’d be smug AF now, because they are currently $27 each. I know right! Although, why people still buy all those CDs and DVDs baffles me completely. (By the way, if you like these figures, the ASX website has heaps of fun graphs and charts)

So, you can choose your own shares or you can let someone else do it. But even the pros get it wrong sometimes. What we hope is that they get it right more often. Which brings me to the third point.

Don’t put all your eggs in one basket. This is good old ‘diversification’. As we have discussed before, that’s just a fancy way of saying don’t stock your wardrobe full of just ballet flats, or just high-heels, or just runners. That’s crazy. Same with investments. If you buy shares, buy a range of them, because they will all perform differently over time, and in different conditions.

But how do I buy a whole bunch of different shares with just $1000?

Glad you asked! You can either buy a managed fund or an exchange-traded-fund (ETF). They pool a lot of people’s money and spread it out over a range of shares. (You can click the links to find out more about them).

I won’t give you advice on which ones to choose but I can tell you that I have the Acorns app. This takes small amounts of money out of my bank account every week and puts it into an ETF. It’s pretty cool because you don’t notice the money going out.

I don’t fancy myself as a stockpicker. Firstly, I just finished that subject in my post-grad course, and it was seriously the hardest fucking thing I ever studied. Secondly, I don’t have time to dig into the company accounts of potential investments.

So I put share investments into my mental list of “things better left to experts” (along with tax returns, powerlifting training programs and making laksa).

If you do want to go it alone, you can easily sign up to a broker and do it yourself. Check them out at Canstar (a comparison site).

“Sheesh, that’s so much information, I am just as confused as ever”. 

Ok I hear ya. There is a lot to know. You can always talk to a financial adviser. Or you can just start small. For example, download Acorns. Pop $500 into a managed fund or ETF. Or have a ‘fantasy portfolio’: pick some stocks and watch them over a period of time to see how you do.

What I would say is this: if you haven’t bought a property, (or even if you have), shares are one more option for you to build wealth and become a certified Fierce Girl.

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