Don’t wait to get ahead
Personal finance guru Effie Zahos examines just how important investing your money is to getting ahead of the game.
You may be a brilliant money manager with healthy spending habits, a realistic budget and not much debt, but if you're not investing, you're never going to really move ahead financially.
Sounds harsh but investing puts your money to work so you do less of the heavy lifting.
The good news is that it's easy and there are plenty of options that don't require much money to get started.
Where to invest
Forget everything you've seen in the movies. Real-life investing is about setting goals and choosing investments that let you achieve them. It also involves considering risk because while we all want juicy returns, some investments are riskier than others.
There's a huge selection of investments but most fall into either cash, fixed interest, property or shares.
Property – are you really ready for the commitment?
Let's face it, Australia is a nation of real estate junkies.
An investment property will let you earn rent, and over time the value of the place will grow to give you a capital gain.
However, buying a rental place is a solid financial commitment, and you're probably going to need to take on a major loan to buy – something not everyone is comfortable with or qualifies for. And there are expenses that come with owning property.
It's important to choose the type of property and the suburb you invest in carefully. Look for a growing population, lots of renovation action, local employment opportunities and decent transport.
And work out if you can actually afford to own a place, even when it's vacant for a long period, if the tenant wrecks the joint, you lose your regular job or if interest rates rise.
What about a fraction of a property?
If you can't afford a whole property, you can pick up a stake in a place (for a fraction of the cost) with a new breed of fractional investment options.
The idea is that an investment property is divided into different slices or units. You can own one or 100 of these slices depending on your budget, and the ongoing costs of each property are paid for out of the rental returns from tenants.
Shares sound complex (they're not) and have a lot going for them. They have historically dished up strong returns, they're low maintenance and you don't need much cash to get started.
The ASX recommends around $2000 so the cost of brokerage, which applies when you buy or sell, is a small proportion of the value of your trade. Brokerage can be as little as $10 for a $10,000 trade.
The downside is that shares can rise and fall in value, sometimes dramatically over short periods.
Managed and exchange traded funds – instant diversification
Diversification is a golden rule of investing. It means spreading your money around so that a handful of duds don't drag down your other investments. The problem is it's hard to achieve diversification without bucket loads of cash; however, the solution can be a managed fund.
This is where you pool your money with other investors. The fund has a much larger bucket of cash to spend so you get instant diversification for a small investment. And you don't have to think about which shares you should buy or sell, or when, because the fund does that for you.
Funds make investing easier but they do charge fees. The common thread is that all managed funds charge an annual management fee (that's the MER or management expense ratio). The annual MER can be anything from around 0.19% to 2.50%. But if a fund charges 2.50% in annual fees, it needs to earn 7.5% for you to earn an after-fee return of 5%, and that's not easily done year after year.
These funds justify their fees because they are often actively managed. That just means the management team is constantly trying to beat the market by working out which investments will do well. Sometimes a fund will beat market returns, and sometimes it won't. The problem you face is that you pay the fees whether the fund makes or loses money for you.
If that sounds a bit rich, there's a cheaper solution. Exchange traded funds (ETFs) don't try to work out the next big thing. They typically mirror the returns of a particular market index, like the All Ordinaries. There's no second-guessing the market, no heavy-duty research and a lot less trading of investments by the fund. Because of this, ETFs can charge super low fees from as little as 0.10% down to 0.04%.
There are plenty of ETFs and because they're ASX listed, you can buy them in a similar way as shares through an online broker. Some focus on the biggest companies on the ASX, others invest in tech companies or overseas companies. There are even ETFs that cover commodities, fixed interest and gold.
With a smorgasbord of ETFs to pick from, you can mix and match to build your own buffet – maybe an ETF with international shares for entree, another with Aussie shares for mains and perhaps a fixed-interest ETF for dessert. To see exactly what's available, head to the ASX website (asx.com.au) and you'll see ETFs listed under the "Products" menu.
When should you start investing? Now!
It's not hard! After that first trade of shares or units in an ETF, you'll realise just how easy it is. So go ahead, set your goals and start spreading your money across a whole range of different opportunities. I can't guarantee you'll always pick a winner. That's investing. But if you choose
your investments with care, over time your wins will far outweigh your gains, and your money will be humming along doing plenty of the hard yards on your behalf.
This is an edited extract from A Real Girl's Guide to Money: From Converse to Louboutins (Bauer Media Books, RRP $24.99) by Effie Zahos.