How to Start Investing: Time is Ticking
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Would you love to get investing in the stock market but don’t know where to start? This article will provide information to get investing within an hour. No more procrastinating!
Time in the market is the single most important factor in returns. Compound interest is an incredible super power that can grow or destroy (through debt) wealth exponentially.
In the graph below, as time passes the amount contributed and total amount separate – due to compound interest. Eventually, compounding builds a money making machine, where the interest/capital growth/dividends earned outstrips your contributions – a great feeling!
Where to Start Investing
You are already invested in the stock market – through super. I’m now grateful the government forced me to use the power of compound interest from the age of 24. I didn’t really appreciate it at the time.
The super account, fees, portfolio and insurance may not have been completely appropriate, but it’s better than what I would have saved for the first decade of a career – nothing! To find out all you need to know about super, read here.
Outside Mandatory Super- Options
Outside this 9.5% mandatory contribution (unlikely enough to provide the retirement you desire), you have several mainstream options in saving for the future
- Voluntary super contributions – taxed at only 15% assuming you remain under $25000 contributions per year and earn less than $250000. Ideal for higher tax payers who don’t mind their money being locked up for a long time (it stops you saving it after all!
- Purchasing investment property – Leverage is powerful in magnifying growth (and loss) but needs significant savings or equity to enter as well as time and knowledge. Tax benefits are especially beneficial to high tax payers, but only if the asset if chosen correctly.
- Stock market outside super – Remains accessible rather than being locked up until your preservation age. Ideal for those with a low income or long term stay at home partner on a low tax bracket. For a non-working partner, 0% tax will be paid on growth until dividend income reaches over $18200 (this will take a while!)
- Savings accounts and term deposits earning ~2-3 % are really only keeping pace with inflation and are not a realistic option for long term wealth building. Important for an emergency fund though!
How to Start Investing in the Stock Market
So, if you have decided investing in the stock market outside super is appropriate for you, there is an overwhelming number of books and articles on how to do this. Here are my recommendations for best personal finance books for Aussies.
The easiest route recommended lately is index funds or ETFs. You have got to open a brokerage account, work out which funds to buy, how to put in the order, and usually need to save up a minimum to be invested.
These barriers can mean people don’t get around to starting for years after they meant to. Back in 2008, I was a resident having just purchased my home. I didn’t have a lot of cash to invest, and no idea how to go about starting…if only micro-investment apps had been around, I may have been able to get in on the best time to invest during my lifetime.
You may not have enough money yet to consider it worthwhile investing, and brokerage fees will be an unreasonable percentage of your investment amount.
There is nothing like being invested in the stock market already to truly understand your risk profile. We all like to think we would hold strong and not sell at the worst possible time. History tells us its human nature to lose nerve and do just that (sell at the bottom).
What Is Micro Investing?
I am an advocate for micro-investing before you have REAL money spare. Putting small amounts of money into the market automatically and experiencing the ups and downs and related emotions of volatility.
There are some apps that literally sweep electronic spare change (eg the 50c after buying a $4.50 coffee). This sounds useful for hopeless savers and broke students to save tiny amounts, but consider the fee structure carefully. Others you can set a direct debit up, from as little as $1.
Once you have experienced your precious savings (no matter how small) reducing suddenly and unpredictably a few times, you notice the pattern that it always comes up again – and often rewards you for holding on tight. If you do lose your nerve and take your money out, this is much better with a few hundred invested than a few thousand. You will also have a much better understanding of your likely behaviour in a big stock market crash. This information can be used to design a more conservative portfolio with lower volatility.
Micro-investments are usually re-balanced automatically once you have invested enough to pay fees. I am a fan of automating most things, and this is no exception. Re-balancing myself 2-4 times a year would provide lots of opportunity for me to doubt my strategy (especially with the market down) tempting me to change allocations. Its hard to sell your best performing asset!
Micro-investment apps generally charge no brokerage fees. This is a massive advantage for those with small balances, but the management costs (as they are recurring) break even, and become more expensive than buying assets directly and paying brokerage fees once you have over $50,000, depending on fees obviously.
So, can you start in a micro-investment app and once you have over $50K or so, sell and buy index funds or ETFs? Yes, but don’t forget to consider Capital Gains tax – which you will have to pay on any gains when you sell. If you have held the asset for at least 12 months you will get a 50% discount on your marginal tax rate.
Robo-advisors and micro-investment apps are incredible new(ish) tech that make investing far more reachable for those on average incomes. They often come combined.
What is a Robo-Adviser?
A robo-adviser is an online platform that asks clients a number of questions and uses an algorithm to suggest an investment portfolio – taking in to account factors such as your age, investment goals and risk profile.
They cannot currently make truly independent advice, or consider complex scenarios, and do not give advise on asset protection. Robo-advisers typically have extremely low fees, involve no human interaction, in my view, lowering opportunity for conflicts of interest.
These robo-advisers are time efficient – there is no need for an appointment, an account can be set up at 10pm in your pjs. The different platforms often have educational resources to help you learn about investing.
Which Roboadvisor and Micro-investment app is Best?
New apps are appearing in Australia every few months, so there is plenty of choice. Factors to consider include
- What happens if the company dissolves? Do the shares belong to me or are CHESS sponsored
- Minimum for investment
- Management costs – can be free (with downsides) up to 0.65%
- Investment choices offered
I have summarized a few points about the apps below.
Investment Choices offered
$2.50/month under $10,000 then 0.275%
Legal title of ETFs held by custodian
6 choices including socially responsible
Free 1st 6 months
0.66% fee or $5.50/ month under $1000
HIN at CHESS subregistry
5 portfolios offered. Options for SMSF and Investing for kids
$5/month up to $1000 then 0.65% (0.6% over $50000)
Investments held in your own name in Macquarie cash management account
5 portfolios with socially responsible option within each
0.5% up to $199000
Assets held in your own name
5 core portfolios to choose fom
$1.25/month under $5500 then 0.275%
Australian Executors Trustee (prof custodian) is independent from First Step and holds investments
3 core portfolios to choose from with “themes’’ that can be added to each – including eco, health, tech & Asia
Free under $5000 then 0.05% for Voyager 0.1% for Universe portfolio
External custodian – “If spaceship voyager money could be moved to another responsible entity or assets sold and money returned”
Spaceship Voyager (Index fund) or Spaceship Universe (Active management)
Brokerage fee (when buying) $2 for up to $1000 –or regular transfers. No ongoing fees*
Investor owns shares
7 portfolios to choose from including Sustainability Leaders
Free under $10000 (can get more free by recruiting friends) then 0.6% discounted to 0.5% over $30,000
Investments held by Saxo Capital Markets in your own name
5 portfolios according to risk profile
NEW – Vanguard Personal investor 0.2% fee (as the others on top of the underlying fund fees) $5000 minimum
How to Start Investing
Which app is best for you probably depends on how much you are wanting to invest in one go.
I have good personal experiences with RAIZ and Quiet Growth, although the fees with RAIZ are expensive for small amounts under $5000 and Quiet growth gets pricey once you have over $10,000 invested.
With small amounts (under $1000) to invest, First Step or SpaceShip Voyager probably offer the best value.
If you have $3000 to start with, look at Quiet Growth and Commsec Pocket.
With over $5000, consider buying directly using SelfWealth online brokerage, RAIZ, Vanguard personal investor or FIRST STEP if you’re not ready to choose on your own. It will become expensive after you accumulate ~$50,000.
Remember you will have to pay tax on dividends, and any gains if you sell your portfolio, and consider the best timing for this.
It is important to get independent advise and not make financial decisions based on an anonymous blog!
Who has used a micro-investment app? What were your experiences?