Thanks to our friends at Vanguard.
This article contains factual information only and it is not intended to imply any recommendation or opinion about a financial product.
We’ve all been advised of the financial gains you can experience by investing, yet for most of us, the process feels complicated and full of jargon. Throw in a global pandemic and turbulent markets and it can all just feel too hard.
Vanguard are all about making it easy for investors, and they want to empower women to make informed and educated investing decisions. In a recent Masterclass Online, we were joined by Rachel White, Senior Manager, Investment Product Strategy at Vanguard, for a run down on all things investing.
What is investing and why does it matter?
Investing is all about committing money (or another resource) to secure your financial goals. It involves you giving your money to a company, government or other entity in the hope that they provide you with more money in the future. As Rachel said, “you work hard for your money, so your money should work hard for you.” Thanks to the magic of compound returns, the earlier you start regularly contributing, the bigger financial impact you’ll have.
While we can’t control all factors of the market, we can focus on these four principles:
- Goal setting (creating clear and appropriate investment goals)
- Balance (developing a suitable asset allocation using diversified investments)
- Cost (minimising cost)
- Discipline (maintaining perspective and long-term discipline)
Where do I start?
By goal setting! This can be the difference between aspiring to your goals, and actually reaching them. When goal setting, picture your life goals in the short term (1-3 years), medium term (4-6 years) and long term (7+ years). When planning goals, it’s important to make the distinction between your essential needs and non-essential wants.
Tip: Before you start investing, it’s important to pay off any high interest debts (we’re looking at you, credit cards), and build a three to six month emergency fund of savings to cover yourself.
What can I invest in?
The term ‘asset class’ pops up a lot in investing chat, and it refers to a type or category of investment. Think cash, bonds, real estate or shares.
- Cash is the lowest risk asset class, which means it also has the lowest return. That being said it still plays a really important role in our portfolios, it’s readily available and great for short term goals.
- Bonds and fixed interest assets are very similar to a loan. They are a debt instrument with a promise to pay back the money with interest. Think of them as a flipped version of the way a property mortgage works. They are great for short to medium term goals. When you buy bonds and team them with shares, they help to balance your portfolio through diversification.
- Property has a higher risk profile than bonds or cash, however it has potential for higher returns. An increase in property value is referred to as capital growth or capital gains. A loss is referred to as capital loss.
- Shares involve buying a small amount of ownership in a company. They can be bought and sold on the stock exchange (such as the ASX). The return is in the form of a dividend and capital growth. Dividends will vary by company and are not guaranteed. Share returns are typically higher than what you would receive from cash or bonds. As they fluctuate in price, both the risk and potential return value are high.
The importance of diversification
Think of diversification as the opposite of putting all your eggs in one basket. You can reduce your risk as an investor by spreading your investments around a variety of geographies, industries, asset classes and company sizes. When times are uncertain, diversification is one of the most important things to factor into what you choose to invest in.
Tip: For most people, purchasing property can be the biggest investment they ever make. When doing so, Rachel recommended spreading any additional investments across other asset classes.
Managed Funds and Exchange Traded Funds (ETFs) explained
These types of investments offer you instant diversification.
- Managed Funds pool money from many investors to invest in securities such as shares, bonds or other assets. They are professionally managed and come with a management fee. Managed Funds are unlisted and are purchased directly through an investment manager. Minimum investment begins from around $5000 (depending on the provider), and there is typically no brokerage fee to transact.
- ETFs are a managed fund which is traded. They are professionally managed and come with a management fee. They are generally cheaper as they take an indexed approach. ETFs are listed on the ASX, like shares. Prices fluctuate throughout the day. They come with a minimum investment of $500, and typically incur a brokerage fee to buy into.
Share market 101
Also referred to as the stock exchange, the share market is where investors come together to buy and sell shares in publicly listed companies. Share prices are set by supply and demand in the market as buyers and sellers place orders. They may rise and fall in response to various factors, including company performance, economic changes and demand.
In Australia, shares are traded electronically on a centralised exchange such as the Australian Securities Exchange (ASX).
Buying and selling shares works like an auction marketplace. When a buyer and seller agree on a price, an exchange is made. If there are more buyers than sellers, the price increases. And likewise if there are more sellers, than buyers, the price decreases.
What will it cost me?
Minimising cost is a critical part of every investor’s toolkit, because costs are largely controllable:
- Higher costs eat into return
- Creates a gap between market return and actual return
- Lower cost providers have performed better over time
One way to minimise costs is to engage in an ETF, as they are generally cheaper.
Where do I buy shares?
It’s important to find a platform that suits your needs and costs. Some platforms will just offer shares, some will offer shares, bonds, ETFs and managed funds. Work out which key platform features matter to you and do your due diligence before taking the plunge.
Help! The market has crashed
Discipline is the most common trait of good investors. Research shows that women make better investors, as we can maintain perspective, keep our cool and stick to our plan when markets fluctuate. Asset allocation will drive 90% of your long term wealth, not timing or what you invest in. As Rachel said, “if you’ve sat out of the market for 1-2 years because of timing, you’ll miss out on the compounding during this period.”
Volatility refers to the rate at which the price of an asset increases or decreases in a given period. What’s important to note is that history has shown that markets generally trend upwards over the long term. Looking at COVID-19 in particular, the market has recovered extremely quickly, because the government has been quick to respond with economic stimulus packages.
When faced with a market crash it’s important to:
- Think long term
- Stick to your plan
- Don’t be tempted to time the market, as spontaneous buying and selling can be costly
- Focus on consistency to take the emotion out of investing
Top 5 tips for first-time investors
- The earlier you start, the more time you have to harness the power of compound returns
- Set investing goals and focus on consistency
- Work towards building a diversified portfolio to reduce your risk
- Success is driven by time in the market, not timing the market
- Keep costs low
Vanguard‘s philosophy is simple. They provide low-cost, high quality investments to help investors keep more of their returns. With the launch of Vanguard Personal Investor, you now have access to a wide range of low-cost investment products and the ability to buy and sell managed funds, exchange traded funds and shares on their new online investment account. We have not taken your circumstances into account when preparing this information so it may not be applicable to your circumstances. You should consider your circumstances and the relevant Product Disclosure Statements (“PDSs”) before making any investment decision.