Makin’ Money: How To Start Investing In Stocks
In the next instalment of our financial fitness series, we take a look at investing in the stock market.
We spoke to Wealth Enhancers’ Financial Coach Rebecca Pritchard and Clover.com.au Co-founder Harry Chemay about the basics of getting started building a stock portfolio. And a reminder: just as you should talk to your doctor before starting a physical fitness plan, you should always consult a reputable professional about your finances before making any major money decisions. The information here is general and may not suit your individual needs or circumstances.
Between work, working out, family and even squeezing in a little “you time”, thinking about your finances beyond “what can I treat myself with after my next paycheck?” or “Can I afford to buy organic veggies?” can sometimes seem a little challenging.
The thing is, generating wealth may not be as complicated, challenging or time-consuming as it can seem. And small steps now can mean greater security in the long-term.
Financial coach Rebecca Pritchard says the biggest danger for millennials is actually not doing anything. “We’ve got to get in there, starting small, learning, building up. If we invest alongside cash strategies, risk management (insurances) and maintaining a sustainable lifestyle, it’s actually pretty hard to go too far wrong,” she told IL.
Ok, so where do I start then?
There is plenty of free education around: you can talk to your bank, your super fund; listen to a podcast or blog, or look at online resources (there’s a list at the end of this article). Pritchard says a good place to start is with a brand or company you know and trust.
“Write down any questions you have and have a play with Google,” she says. “However, be mindful that you’re never going to have all the answers. Ever. We need to make peace with that else we’re going down a Google and YouTube rabbit hole and we’ll never take our first steps.”
Knowing which stocks to buy can be tricky – and that is where expert help comes in handy.
Generating wealth may not be as complicated, challenging or time-consuming as it can seem.
Websites like Clover.com.au use maths to help automate (or build) a portfolio. Co-founder Chemay says automatic, or “robo-advice” is a “catch-all term that can mean many things”.
“What Clover does is allow Australians to commence saving or investing for their medium to long term goals without the need to see a Financial Planner, and at substantially lower cost,” he says.
If you want to stay old-school, consider employing a registered stockbroker to invest on your behalf. This is a common way to “play” the market. Even Pritchard, who works in the finance industry doesn’t pick her own stocks.
“To do well, a lot of time and energy is required to monitor, understand and act on market activity,” she says. “Therefore I instead use an expert … I’m happy to pay a small fee (usually less than 0.5% of my investment balance) for this.”
How much will I need to kick things off?
Platforms like Raiz Invest allow you to start investing with as little as $5. At Clover you can get cracking with a few hundred and Pritchard says at Wealth Enhancers, she can start members on portfolios from just $100 per month. So if you thought you needed a few thousand to kick things off, think again. Pritchard’s advice? “Start small, build it up over time. My husband and I started with $250 per month between the two of us about six years ago, but we’ve ramped that up quite a bit since then.”
Cool, but I have a healthy savings account and my super is sorted. Why do I still need to do this? I’m not that into risk.
Pritchard says there are “three key scenarios” that dictate when we can access our super: when we hit 65, when we die or when sh*t hits the fan, meaning financial hardship or total and permanent disability.
“Two of these are awful scenarios, and the other is a long way off, so we almost need to rule out Super in a lot of ways when it comes to our short and medium-term financial freedom,” Pritchard says.
“Property can be fabulous, but it’s chunky, a long-term asset and doesn’t give us a lot of flexibility or liquidity (the ability to convert to cash). We can’t sell the kitchen if we want or need more money.”
Pritchard says investing in the stock market is an “incredibly complimentary” strategy that can give you flexible growth assets you can use before Super becomes available. You can also ramp up or down your level of investing, meaning you’re less locked in if your circumstances change.
How can I do this while I’m still paying off a student loan?
Pritchard is an advocate of what she calls the “bypassing zero” approach.
“Normally when you clear your debt, it feels fabulous for a few moments, and then you realise you’ve busted your arse to get to a point of zero. And that’s pretty sobering,” she says.
“By having a small savings and investment strategy alongside smashing down debt, once your debt is gone, you’ve waltzed past zero and have a big head start on your other goals. It completely changes the feeling, and also dramatically reduces the likelihood of you returning to a debt position in the future. It may take a little bit longer with this approach, but it’s far more sustainable and makes us feel so much better.”
In other words: balance paying off your debts with saving and investment, all in small and manageable bites.
“Perhaps it’s only ten or fifty dollars per month that you invest, and the bulk of your resources go towards debt. This is still a big win,” Pritchard says.
What should I be wary of?
Pritchard says investments are an area where if it seems too good to be true, it probably is.
“I often speak to people who say ‘my mate can get me access to a fund that returns 20 per cent per annum’. I say, ‘go for it then, you don’t need to speak to me, because that’s a cracker of a return and I’m certainly not promising that’.”
Pritchard says we need to “be prepared when we invest that our money might be tied up for a little while, particularly if the markets are choppy (volatile)”. While stocks will go up and down, she says a return of around 6 to 8 per cent over time is reasonable.
“Another way to self-check (if you’ve got a mortgage), is, to look at if the return on your investments is more than the interest you’re paying. For example, ask yourself: ‘was I better off investing in the market than putting my money onto my mortgage?’” she says.
“We need to always have some cash as well as investing. That old saying ‘only invest what you’re prepared to lose’ is true, but if you’re investing in diversified portfolios from a reputable provider, I think losing everything is less of a worry,” she says.
Are you already a keen investor? Who taught you the ropes? Or do you use a coach, advisory firm or app? We would love to hear about your experiences investing in the stock market.
- ASX – Investing Long Term
- ASX – 5 Rookie Mistakes When You Start Investing
- ASX – First Time Investors
- Wealth Enhances – 5 Tips For Building Wealth