As we begin our working lives, there’s one thing that stands out: ‘woah, look at all this money I’ve earned!’ In normal (non-coronavirus) circumstances, this will coincide with going out more, going on holidays (ones where the family isn’t paying!) and buying new things, whether it be that new piece of tech or fancy clothes. This is called spending (duh!). With whatever’s left over (hopefully still a bit!), chances are it’s either going to be sitting in a bank account (or even worse, under your mattress). This is where investing comes in.
But as you and I both know, these are not normal investing circumstances. COVID-19 has not only upended our spending habits but also provided a volatile share market. That’s not to say opportunity doesn’t exist - in fact it’s during times that windows of opportunity open up. Even if it’s just buying into the market while it’s at a low (to get the long-term gain when it hopefully recovers), COVID-19 actually offers a great period to consider investing.
So, how should you be investing all this money? It’s a big question, but we’re going to try and make it as easy as possible. We’ll look to cover the following questions:
I remember when I started working part-time during university, I finally had some decent moolah in the bank. Back then, interest rates were higher, and I thought earning 4-5% p.a. was decent. But at the same time, I saw equities (shares) return at least double that, and I felt like I was missing out!
In my current role in investment consulting I see first-hand what returns could be like if you dedicate some time and effort to investments.
Nowadays, interest rates are much lower - the amount we earn by leaving our cash in the bank is closer to 2% p.a. Yet in 2019, the returns for the Australian equity market were over 20%!
Of course, just prior to my time at university, the GFC happened. During this period, global equities fell around 50%, reminding long term investors that while investments come with a positive expected return, they also carry a level of risk with them.
Below we discuss how to think about investing and highlight our top tips for putting your money to work.
Asset classes are essentially different types of investments. Each asset class will behave differently in the market depending on their risk and return. The main asset classes to think about are:
Diversification is commonly referred to as the only free lunch when it comes to investing. And I don’t know about you, but I love free lunches.
Diversification is important in a portfolio as it can reduce your risk without reducing your expected return. This is because different assets and asset classes are likely to do well and poorly at different times (that is, they are not perfectly correlated).
The benefit of diversification means when investing in shares, for example, you should invest in lots of different shares to diversify away company-specific risk. Similarly, you should invest across different asset classes to diversify away asset class-specific risk.
So, we know what asset classes we can invest in, and we know a diversified investment portfolio is better than a concentrated one. But how do we actually invest our hard-earned cash?
There are a couple of ways to invest, so we’ve broken this section into these sub-sections:
Within each sub-section, we’ve broken down our top picks into our recurring categories:
It’s easy for people like you and me to buy and sell shares. Using an online broker is great for those who want to research companies and pick those they believe are likely to do well. It is also great for people who do not want to invest in particular companies, which can be difficult when investing passively through an ETF or when outsourcing this decision to an investment manager.
We have selected a few online brokers based on our recurring categories. Typically, when you want to buy or sell a stock, you must pay a fee. Fees differ quite a lot between providers, and can add up over time, particularly if you are investing small amounts of cash at any one time (given these fees tend to be fixed, rather than a percentage of your investment).
In this category, we consider additional services an online broker can provide. These include access to a broader array of markets, data on companies, stock reports and charting features. Naturally, these providers will charge higher fees.
ETFs are exchange traded funds. These are funds that invest in a number of underlying assets that can be bought and sold on an exchange via an online broker (like the ones we listed above) or by direct investment via an application form.
The main benefit to ETFs is they provide access to a wide array of investments (remember diversification?). Most ETFs are passively invested, that is, they provide exposure to an entire market.
The ASX 200 is a popular ETF example. An ETF investing in the ASX 200 will invest in the 200 largest stocks, based on the relative size of each company in that portfolio. So, Commonwealth Bank is around 2% of the ASX 200, BHP is about 1.5%, and Woolworths is about 0.8%. So, when you hear that the ASX has risen by x% over a certain period, a passive ETF investing in the ASX will give that return, less management fees.
There are many ETF providers out there, and many ETFs! We recommend looking at the offerings of a few large ETF providers, including Vanguard, iShares (BlackRock), SPDR (State Street Global Advisors) and BetaShares.
Below we highlight our favourite low-cost ETFs, passively investing in the most common asset classes. We also include past returns for these ETFs, but we must warn you: do not compare these apples and oranges! This is because they invest in different asset classes with different levels of risk and expected return. We have also shown returns for the longest period possible for each ETF, and so these time periods vary greatly since some have not been around for too long!
Our “More than Money” category considers some more niche and actively managed ETFs, which will typically charge higher managemnt fees. Once again, our warning with comparing returns applies!
While investing yourself can be fun and provide great rewards, it is also challenging and time consuming. Investing is a full-time job for many – as it is for me – and competing with them can be extremely difficult! There are however managed funds and neo-investments which can invest your money for you – of course in exchange for a fee.
Neo investments are new investment platforms that allow you to invest in a range of asset classes, often through an easy-to-use app. Many of these providers will invest passively, aiming to provide close to market returns. Typically, neo investments will charge low fees and allow you to customise your portfolio to fit your risk tolerance.
Our price is right category focuses on these lower cost, neo-investments:
Fund managers invest clients’ money in exchange for a fee. They can invest in a range of asset classes and employ a myriad of different strategies. Many fund managers invest actively (trying to ‘beat’ the market). All else equal, active managers will charge higher fees than passive managers, given they expect to produce higher returns. While many fund managers require large investment amounts, making them only accessible to institutions, there are many that are open to retail investors.
Our more than money category focuses on these more active offerings:
Woah, that was a lot to take in. If we haven’t turned your brain to mush yet, some final top tips to get you on your way:
And there we have it – some top tips to get you on your way to construct an investment portfolio that’s right for you (and for our current circumstances)!
Stay tuned for upcoming topics or check out our other useful articles here. We’ve got plenty more gold to help you make the leap from top student to top professional!
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Disclaimer: The information provided in this topic is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs.