Investing - How to Get Started - Episode 35

Research from the Australian Stock Exchange found that in 2014, 36% of adult Australians owned investments listed on the share market. Combined results from RP Data and Census data found 7.9% of the Australian population own an investment property. Now there would be some cross-over here with people holding both shares and investment property, but we can safely conclude that at least 55% of the adult Australian population holds no investments outside of their superannuation.

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Back in episode 27 we explored what was required to achieve financial independence. In a nut shell, determining what your living costs are for the lifestyle that you want, and then finding a way to generate that sum of money each year is the solution.

So let's say you've done your numbers, and you know that for you to achieve financial independence, to gain the choice that is the goal of Financial Autonomy, you require X dollars per year. How do you then go about generating that?

Now of course regular listeners and readers will know of my passion for the Side Hustle as an important element in anyone's financial independence aspiration, and so that may well provide part and perhaps all of the solution. Gig economy type freelancing work could also contribute. Or it could just be as simple as a regular employed role that you enjoy.

Another common way to meet income needs for those seeking financial independence is to build up income producing investments. That might be property that throws off rent to the owner, or it might be shares that generate dividends. Your investment income might meet some, or perhaps even all of your expense needs. Whilst the desired destination of achieving financial autonomy is not to be able to spend day upon day sitting on the couch in your underpants, if your expense needs are meet through investment income, this is at least an option for you from time to time. I'm a pretty driven person, but even I like the odd afternoon, remote control in hand and Netflix to burn.

So in today's post, we're going to explore how you might get started on your investment journey. It's easier than you think!

Let's start with the shares vs property question. It's a bit like asking whether you're a dog or a cat person, most people pick a camp and will explain to anyone who will listen that their chosen camp is the right one.

The truth is shares and property both work as a way to build wealth and generate income to enable you to achieve financial independence. Each have pro's and con's. But I need to nail my sail to the mast here at the outset and say I'm a shares guy. With my wife, we own both shares and a property other than our home (we have a cat and a dog too, so we're obviously serial fence sitters). But my preference investment wise is shares, and I'd suggest that if you're looking at getting started in investing, shares is where you should be looking too.

The great things about owning investment property is that you can borrow fairly easily, and that means returns are magnified via the power of gearing. Many people also like to invest in property because it's a physical asset, something they can see and touch, and that gives them comfort.

But as anyone who's owned or even simply lived in a property knows, properties wear out. They need maintenance. We own a small office in our super fund, and whilst commercial property is less involved that residential, even so we have to deal with body corporate issues, ongoing expenses like council rates and insurance, and tenants. Just yesterday I had the tenant tell me that there was an annoying vibration type sound coming through the roof, and so could I please get the air conditioner unit that sits up there serviced because maybe that's the cause.

With shares, you never have these issues. Buy them, tell the registry where you want your dividends to go, and they require no further input from you.

Now I know that when I suggest that shares are a good investment option I always get someone email me and say that I didn't talk about the huge risk associated with investing in shares. "What about the GFC" they say, "my neighbour lost everything". So let's tackle the shares are hugely risky myth head on.

As an investor, you want some risk. No risk means no investment return. Risk and return are opposite sides of the same coin. What you need to decide is what level of risk you are comfortable with. If you are only comfortable taking on the risk of not keeping pace with inflation, then cash in the bank is the investment for you. If you want to earn more like 5%, then you need to take on only a small amount of investments that have any volatility associated with them, but in the current interest rate climate at least, you do need to take on some risk. If you seek a 20% return, then you're going to need to take on a whole heap of risk, probably including borrowing to leverage your outcome.

So risk is not bad, but understanding the level of risk and what you are comfortable with is very important.

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Next, what does "risk" actually mean? Technically it means volatility. To most people, risk means the chance of them losing their money. The more stable the value of an asset is, the less risky it is considered. An asset whose value changes a lot is considered more risky. This is because you may need to sell your investment, and if you're unlucky enough to sell at a point when the price is down, you may have a bad outcome, perhaps even get back less than the amount you spent buying the asset in the first place.

Because shares are constantly bought and sold, prices are always known. They go up and down as a business's fortunes rise and fall, and as external factors weigh on the price people are prepared to pay for the company's shares. This leads to the view that shares are a volatile asset and therefore they are risky.

The thing is though, all the price is telling you is that, if you wanted to sell right now, here's what you could get for your share. If you have no intention of selling, the price really doesn't matter. Rather than being a negative, the fact that you could sell almost instantly if you wanted to should be viewed as a positive. Something unexpected comes up and you need cash fast. You could sell your shares and have your cash in the bank in 3 days. That's faster than breaking the term on a low risk term deposit.

And so onto the "lose all my money" claim that always comes up, though it's always the friend or neighbour this has happened to, never the person themselves.

Firstly, shares are cheap. Most quality shares cost between $10 and $50 each. So even if you only have a few thousand dollars to invest, you can afford to buy shares in a few different companies, ie diversify. Now I would suggest that you don't even buy individual companies, but rather exchange traded funds that give you even more diversification, but that's a discussion for another day. The point is, you never have your entire share investment in a single company. Now 10 years ago, in 2008, the period we now know as the GFC, the share price of most companies fell. But th