I've been posting about investment topics that appeal to me, and outlining my current strategies and tactics. But I realise that this may not be terribly relevant to someone just starting out. So, what would I do if I in my early 20s and was just starting out, knowing what I know now?
1. Draw up a budget and spend less than I earn, so I'm able to put a savings plan into effect. Save up and pay cash for car, holiday etc. than is within my means. Brown bag my lunch, have a 'free' mobile on a $10-$14 a month plan. Don't use SMS, WAP or other services that cost a fortune. Don't waste money on designer clothes or trendy footwear.
2. Have my salary paid directly into an online savings account that pays a high interest rate and allows me to make bill payments via BPay. I have my salary paid into a savings account with Qantas Credit Union which doesn't charge an account keeping fee, provides a free cheque book, provides free ATM access using any bank's ATM machine, provides free online payments via BPay and online transfers to other financial institutions. I can also make a certain number of deposits via Westpac branches for free, which is vital when I receive some income via cheque. The credit union also has a high interest rate online savings account that can be linked to the main savings account. I get all my dividends paid into this account electronically, which makes it easy to keep track of dividends for my annual tax return.
3. Make an undeducted (ie. out of my after tax income) contribution of $1000 pa into my superannuation account (this assumes I'm earning less than $28K so can get the maximum co-contribution of $1500. If I earned more than this, but less than the $58K cut-off, I'd contribute a smaller amount that entitles me to the maximum possible co-contribution. To work this out I use the calculator provided by the ATO
4. Shop around for the best superannuation fund - one with low admin fees, no contribution fees, and suitable investment options. eg. An industry super fund or perhaps a Vanguard Super fund.
5. Invest my super in the high-growth options. With 40 or more years for the investments to grow I'd put 50% in domestic equities, 30% in global equities, and 10% each in real estate and bonds.
6. If investing in real estate I'd save 20% deposit to avoid having to pay mortgage insurance. I'd buy my own home before any investment property so I can qualify for a first owners grant and get stamp duty concessions. I'd check out the property cycle for my city to make sure I'm not buying at the top of a boom phase. A couple of years after prices have dipped in real terms and stabilised is a pretty good time. I'd get a price guide for the suburb I'm looking at (cost around $30) to know what similar properties have sold for in the past year. I'd always inspect a property several times before making an offer. I'd never believe a real estate agent that says he/she has other interested parties coming back later today to make an offer. In fact I'd always check everything that a real estate agent tells me. And I'd make sure I get a building inspection done before exchanging contracts.
7. If investing in stocks, I'd start out investing in index funds. If I wanted to invest in managed funds, I wouldn't pick last years best performers as they seldom stay top for many years in a row. I'd pick ones with low ongoing fees and invest via a discount broker that rebates 100% of the initial fee. If I wanted to invest directly in stocks I'd make sure I diversify by buying 10-12 stocks in different sectors. I'd know that I have to spend time reading and understanding the annual report for each company, comparing basic fundamental ratios to what is reasonable for the sector. I'd be wary of any "bargains" as there's often a reason the market has priced stocks at a discount or a premium. I'd ignore any broker "research", tips, investment newsletters, or investment magazines. But I'd read many investment books, investment magazines and the investment section of newspapers to get an understanding of investment principles and strategies. I'd bear in mind that you can't believe everything you read - be it investment advice in magazines, or the "hard facts" reported in annual reports.
8. I'd read up on asset allocation, the efficient frontier, the history of investing (eg. tulip mania, southsea bubble, UK railway boom, hunt brothers silver corner etc.), and historical average returns and variability of the various asset classes.
9. When my income moved into the higher marginal tax rates I'd look at salary sacrifice into superannuation of any money I wished to invest until retirement age. For shorter investment periods (or to have some money available in case of emergencies or changed life circumstances) I'd use a margin loan (with a modest LVR of less than 50%) to negatively gear a stock portfolio. Where the dividends are less than the tax deductible interest charged on the margin loan balance I'd reduce my taxable income (at the top marginal rate) and 'convert' it into tax-deferred capital gains, that are only taxed at half my marginal tax rate when gains are realised.
10. I'd continue to invest in my education and cross-skill into areas that are in high demand and well remunerated.
Enough Wealth
June 10th, 2007 at 01:43 pm 1181483030
June 10th, 2007 at 07:14 pm 1181502858
June 11th, 2007 at 09:18 am 1181553535
ladymiller - penny stocks are often assumed to be good value simply because of the low cost per share. But it's important to look at their relative value eg. P/e ratio and growth prospects. Beware of many 'tips' promoting penny stocks via the 'net or rumour, as these types of stocks are often used for "pump and dump" scams. Although a small company with low share price may grow to become the next microsoft or google, it's highly unlikely. My own view is that most people would be better off with a diversified portfolio of larger, established companies, or an index fund. Perhaps a small cap index fund would be an option if you feel small caps have more potential for growth than larger companies? The exception to this advice would be if you have enough experience, knowledge and judgement to be able to fully digest the financials of a penny stock, the sector they are in, and their competition. If you can do all this then penny stocks may provide some potential outperformance relative to the index, as most large fund managers only invest in the larger cap equities. But, if you knew how to do that analysis you wouldn't be asking me for advice