Research from the Australian Stock Exchange found that in 2014, 36% of adult Australians owned investments listed on the share market. Combined results from RP Data and Census data found 7.9% of the Australian population own an investment property. Now there would be some cross-over here with people holding both shares and investment property, but we can safely conclude that at least 55% of the adult Australian population holds no investments outside of their superannuation.
Back in episode 27 we explored what was required to achieve financial independence. In a nut shell, determining what your living costs are for the lifestyle that you want, and then finding a way to generate that sum of money each year is the solution.
So let’s say you’ve done your numbers, and you know that for you to achieve financial independence, to gain the choice that is the goal of Financial Autonomy, you require X dollars per year. How do you then go about generating that?
Now of course regular listeners and readers will know of my passion for the Side Hustle as an important element in anyone’s financial independence aspiration, and so that may well provide part and perhaps all of the solution. Gig economy type freelancing work could also contribute. Or it could just be as simple as a regular employed role that you enjoy.
Another common way to meet income needs for those seeking financial independence is to build up income producing investments. That might be property that throws off rent to the owner, or it might be shares that generate dividends. Your investment income might meet some, or perhaps even all of your expense needs. Whilst the desired destination of achieving financial autonomy is not to be able to spend day upon day sitting on the couch in your underpants, if your expense needs are meet through investment income, this is at least an option for you from time to time. I’m a pretty driven person, but even I like the odd afternoon, remote control in hand and Netflix to burn.
So in today’s post, we’re going to explore how you might get started on your investment journey. It’s easier than you think!
Let’s start with the shares vs property question. It’s a bit like asking whether you’re a dog or a cat person, most people pick a camp and will explain to anyone who will listen that their chosen camp is the right one.
The truth is shares and property both work as a way to build wealth and generate income to enable you to achieve financial independence. Each have pro’s and con’s. But I need to nail my sail to the mast here at the outset and say I’m a shares guy. With my wife, we own both shares and a property other than our home (we have a cat and a dog too, so we’re obviously serial fence sitters). But my preference investment wise is shares, and I’d suggest that if you’re looking at getting started in investing, shares is where you should be looking too.
The great things about owning investment property is that you can borrow fairly easily, and that means returns are magnified via the power of gearing. Many people also like to invest in property because it’s a physical asset, something they can see and touch, and that gives them comfort.
But as anyone who’s owned or even simply lived in a property knows, properties wear out. They need maintenance. We own a small office in our super fund, and whilst commercial property is less involved that residential, even so we have to deal with body corporate issues, ongoing expenses like council rates and insurance, and tenants. Just yesterday I had the tenant tell me that there was an annoying vibration type sound coming through the roof, and so could I please get the air conditioner unit that sits up there serviced because maybe that’s the cause.
With shares, you never have these issues. Buy them, tell the registry where you want your dividends to go, and they require no further input from you.
Now I know that when I suggest that shares are a good investment option I always get someone email me and say that I didn’t talk about the huge risk associated with investing in shares. “What about the GFC” they say, “my neighbour lost everything”. So let’s tackle the shares are hugely risky myth head on.
As an investor, you want some risk. No risk means no investment return. Risk and return are opposite sides of the same coin. What you need to decide is what level of risk you are comfortable with. If you are only comfortable taking on the risk of not keeping pace with inflation, then cash in the bank is the investment for you. If you want to earn more like 5%, then you need to take on only a small amount of investments that have any volatility associated with them, but in the current interest rate climate at least, you do need to take on some risk. If you seek a 20% return, then you’re going to need to take on a whole heap of risk, probably including borrowing to leverage your outcome.
So risk is not bad, but understanding the level of risk and what you are comfortable with is very important.
Next, what does “risk” actually mean? Technically it means volatility. To most people, risk means the chance of them losing their money. The more stable the value of an asset is, the less risky it is considered. An asset whose value changes a lot is considered more risky. This is because you may need to sell your investment, and if you’re unlucky enough to sell at a point when the price is down, you may have a bad outcome, perhaps even get back less than the amount you spent buying the asset in the first place.
Because shares are constantly bought and sold, prices are always known. They go up and down as a business’s fortunes rise and fall, and as external factors weigh on the price people are prepared to pay for the company’s shares. This leads to the view that shares are a volatile asset and therefore they are risky.
The thing is though, all the price is telling you is that, if you wanted to sell right now, here’s what you could get for your share. If you have no intention of selling, the price really doesn’t matter. Rather than being a negative, the fact that you could sell almost instantly if you wanted to should be viewed as a positive. Something unexpected comes up and you need cash fast. You could sell your shares and have your cash in the bank in 3 days. That’s faster than breaking the term on a low risk term deposit.
And so onto the “lose all my money” claim that always comes up, though it’s always the friend or neighbour this has happened to, never the person themselves.
Firstly, shares are cheap. Most quality shares cost between $10 and $50 each. So even if you only have a few thousand dollars to invest, you can afford to buy shares in a few different companies, ie diversify. Now I would suggest that you don’t even buy individual companies, but rather exchange traded funds that give you even more diversification, but that’s a discussion for another day. The point is, you never have your entire share investment in a single company. Now 10 years ago, in 2008, the period we now know as the GFC, the share price of most companies fell. But they didn’t go to zero. For an investor to have lost all their money, as the claim often goes, that’s what’s needed. But that is incredibly rare. And even if you’re unlucky enough to buy into a company that suffers that fate, you will have invested in several different companies, and they won’t all have succumbed to that fate.
Now if you were forced to sell when the price of your shares were down, you will get back less than what you originally invested. But almost everyone who suffers loses on their share market investment doesn’t sell because they actually have to, they sell because they feel they have to. I’ve seen it so many times and yet it still makes me feel sick in the stomach. The number of people who for instance don’t need their superannuation savings for 10 or 20 years, yet when share markets go down, they feel they have to sell. It just boggles the mind. Please, please, please Financial Autonomy listeners and readers, if you take absolutely nothing else from what we put out, please don’t sell your share market investments when prices are down just because of fear or panic. If your shares are in a good company that’s continuing to pay regular dividends, don’t give your shares away to some bargain hunter at a discount.
I could go on, but here’s the key things you need to be aware of when thinking about investment risk, and this applies to both shares and property:
- Time is your friend. Plan your investment strategy so if the price goes down, you don’t need to sell. You can wait it out.
- Some risk, or volatility, is good. It’s why you get a return better than cash. You want some investment risk.
- Diversify – it’s a well-worn cliché, but don’t put all of your eggs in one basket.
- Be wary when borrowing to invest. Borrowing magnifies outcomes, both positive and negative. I believe borrowing is essential for most people in achieving financial independence, but recognise that you are playing with fire and so it needs to be managed well.
Apologies, this post is supposed to be about getting started in investing and I’ve waffled on about risk. I hope you’ve found some value. So let’s get into the meat.
Gaining some experience and confidence is a really good place to start. Open up a share trading account online with one the reputable players. I suggest you buy 1 exchange traded fund (ETF). Check out the likes of the iShares and Vanguard websites for their Australian listed ETF’s and choose one that speaks to you.
Then also buy 2 or 3 individual stocks. Ideally companies that you recognise, maybe even that you’re a customer of. Don’t spend big, maybe as little as $500 to each of these investments.
Then see how they go for the next several months. Experience what it’s like when prices go up and down. Does it stress you? Early on you’ll probably check the prices everyday, but hopefully that will get boring quick, and you’ll move to only checking in every month or so. You’ll start to see some dividends come in, and a bit like barracking for your footy team, you might start to take a bit more notice when your companies are mentioned in the press, and cheer them on a bit.
This is the training wheel step. Hopefully the shares you buy rise in value with time, and also generate some dividends along the way, but the primary gain to made in this stage is just to de-mystify share market investing and overcome the shares are risky myth.
To help your investment portfolio grow, you’ll want to add to it. One simple way to do that is to have the dividend income reinvested back into more shares. Not all shares offer this, but where this is provided as an option, it could be a good way to go.
The next step is to add more of your surplus income, your savings, into your portfolio. Now perhaps that’s buying more shares at regular intervals, but just keep an eye on the brokerage costs, they could add up. It may be more cost effective to invest in a managed fund that makes sense to you, as these typically offer regular monthly savings plans at little or no cost. Like an ETF, managed funds offer you a one stop shop to have your money invested across usually hundreds of different company shares, so they’re a great way to diversify and manage risk. Managed funds have fees of course, (as do ETF’s for that matter), so just do some research to see that the one or ones you are choosing aren’t charging above market rates.
From here, it’s really about time. The longer you hold your investments, the greater the likely growth. This means:
- The sooner you get started the better.
- Don’t fool yourself into believing you can make money as a short term trader of shares. You won’t beat the computers. Buy and hold is the way to go. Think long term.
Just before I wrap up I should also give a plug for my profession. What I’ve outlined here is the DIY way to get started in investing. At some point you will likely gain from some professional input. Even Roger Federer has a coach. Think about finding a financial planner that you can form a long term professional relationship with.
Resources & Links
- Podcast Version
- Attaining financial independence doesn’t need to be hard – Episode 27
- What’s your number? – Episode 31
- The side hustle; your ticket to Financial Autonomy? – Episode 21
- My 68% return. The power of gearing; how smart borrowing can accelerate your journey to financial autonomy – Episode 25