Brace yourselves this isn’t one of my shorter pieces, but it’s a must-read. Investing, it can be pretty daunting for first timers there is a lot to sift through and a lot to learn. So I thought I’d cover some of the basics for when you’ve got some spare moolah to throw around. If you’re not sure how to find some spare cash start here and here.
First of all, why bother investing when you can just let your cash pile up in a sweet safe “high” interest savings account. Well, that high-interest savings account might not turn out to be so high-interest when you compare it to the gains you could chase down through investing. If you saved your money at a 2.5% interest rate you would obviously have a significant amount less upon retirement than if you had invested that money and achieved a 5% return.
A quick example, say we start with $1000 and plan to retire in 40 years, each year I add an extra $1000 to the fund. At 2.5% we end up with $71,772.68 after 40 years. In comparison at 5%, we end up with a juicy $133,879.75, nearly double. A whopping $62,107.07 difference.
I know you’re what you’re thinking…
Me too, and that’s only at 5%, imagine if you managed 7.5%, which in recent years has been easily achievable.
Right so hopefully you get the idea, investing your moolah is a must if you want to be sipping those mojitos poolside sooner rather than never.
So let’s dive into some of the basic principles around investing that you’re going to need to know.
How spicy do you like it? Are you the one who orders a “kiwi mild” butter chicken before running home for a cup of English breakfast before your 9pm bedtime? or do you slip a bit of Adderall in your Mumbai hot masala before popping out for your daily skydive?
Most of us are neither, we like a bit of kick but not too much. This is the same with investing, could you handle massive weekly or daily fluctuations in your investment, would you be able to sleep at night knowing you just lost 20%, some can, some can’t.
Before you start dipping your toes in the water you need to know how deep your willing to swim. Try taking a little quiz like this to get a gauge of what type of risk appetite you have. Using this should help guide your future investment decisions and hopefully save you a few stomach ulcers.
Listen up – this has got to be one of the most important parts of investing. If you don’t diversify you’re gonna then end up cut. It’s the whole never put your eggs in one basket rule.
There have been plenty of occasions where in hindsight I wish I would have sunk all of my capital into one investment such as A2 Milk, I would have made a hell of a lot more than I did. But on the other side of the coin, I’m bloody glad I only had a small amount in Wynyard when it flopped ungracefully into liquidation. I’ll write about those another time.
The point being sure you can put everything into just one product and if it goes through the roof well winner winner chicken dinner go buy yourself that Tesla, but if it belly flops like Enron enjoy knocking on MSD’s door (NZ’s social welfare ministry for you foreign folk).
In order to spread your risk, you will want to spread your investments across multiple asset classes and markets such as stocks, managed funds, bonds, and property. The big issue for us small fishes is diversification can be hard to achieve when you are starting out with small amounts of principal. This is where things such as ETF’s* and managed funds can become a godsend. I will go into depth about the best ways to get into stocks as a small fish another time.
So diversification is super important, you should never have everything in one basket, spread your eggs around and always have some cash handy both for emergencies and for opportunities.
There is a good saying for in the world of investing “Time in the market always beats timing the market”
The point here is that you should be looking to make long-term investments which you will hold for a long period of time. Attempting to buy and sell at highs and lows very rarely works and is a good way to shrink your overall returns. It is hard to anticipate the market and although you might get it right once or twice, you are much more likely to get it wrong more often than not. Buying on hype and selling on panic is not good for your wallet or your mental health.
“My favorite time frame is forever.” – Warren Buffett
On the topic of timing, your investment timeframe should also be front and centre in your investment decisions. When are you going to need the money you are investing? If you are planning to use it for something soon like buying a house it is best to invest in lower risk products to minimise your risk of losing your money during a market correction. As you get closer to needing your cash you should progressively move investments into more secure low-risk holdings such as bonds or term deposits.
Leverage is extremely common in our everyday lives, nearly everyone uses it to buy a home. They go to the bank with 100k and the banks give them 400k meaning that instead of only being able to purchase a house worth 100k they can now splash out on that 500k pad. Using other peoples money is fine and can be a quick way to skip your way to a juicy net worth as all the in your investment are yours to keep. So if that sweet pad shoots up to 750k you’ve just made 250k on your 100k investment.
However, there is risk involved. What happens if sweet pad turns into a shit pad and halves in value? You still owe the banker his 400k but your asset is now only worth 250k, leaving you in a bit of shit place.
This is exactly what happened to plenty of people during the 2008 market crash, they had leveraged themselves into mansions and when the housing market collapsed were left with mortgages many times the value of their property.
Leverage isn’t just used for purchasing property, many investors also use leverage to buy other forms of investments such as stocks, this is something called margin lending. This form of use for leverage is considered high risk however and as with all investments should be considered with your risk appetite and individual situation in mind.
Right, so now I bet you’re more excited about investing than Jordan Belfort with a pack hookers.
So where do you start?
You could look at buying parcels of shares through a broker such as ASB and ANZ. There a few things to note with this, first fees – fees charges by your broker can kill your returns. ASB for example charges $15 for trades up to $1000 in value, and $30 for trades $2,000 – $10,000. Meaning if I buy $1000 worth of shares on the NZX I am instantly down 1.5% because of brokerage. Also unless you have large amounts of cash diversification can be difficult to achieve. Along with this, you need to be confident that your stock picks are safe and that you have done your due diligence.
The next more sensible option, in my opinion, would be to set up an account with a provider like Investnow, Smartshares, or Sharsies, which allow you to contribute small amounts and invest in ETF’s or managed funds giving instant diversification and spreading your risk. For Investnow the minimum entrance amount for a fund is $250, for Smartshares it’s $500, and for Sharsies I don’t believe they have a minimum amount (correct me if I’m wrong 🙂 ). All of these options allow you to contribute small amount regularly without those hefty brokerage fees discussed above so are a much more cost-effective option for starting small. Although note that each fund does charge a management fee so you should check this, ie. the Vanguard Funds available through Investnow charge 0.2%.
So small confession – I don’t completely follow my own advice here, I mainly invest in individual companies and markets through a platform called interactive brokers, I started out using ASB but they became prohibitively expensive when looking to purchase companies on the Canadian, Australian, and US stock markets. So why? Becuase I think I’m a special panda when it comes to picking winners, and get a lot of enjoyment out of researching different sectors, markets and companies. I also monitor my portfolio quite closely and use tactics such as trailing stop losses to protect my investments (I’ll cover them another time). Would I recommend this?
Unless… you’re willing to do your due diligence and can handle the risk. Despite this, I still do have an account with Investnow which I contribute to regularly.
So that’s a little guide to get you started, congratulations if you made it this far, I promise there won’t be many posts this long. If I’ve missed anything let me know below.
The Wolf of Willis Street. (Seriously though please don’t try to be Jordan Belfort. If you aren’t familiar with JB, enjoy)
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*An ETF put simply is a fund that you can buy which is made up of a basket of stocks usually tracking a key index such as NASDAQ or NYSE, or market/ product such as Lithium. These allow you to get a slice of lots of companies in one go, leading to rapid diversification. The difference between ETF’s and managed funds is that ETF’s are directly traded on exchanges so can be bought and sold like shares.