Investing is not an activity reserved for the super wealthy. Anyone with more than $500 can get started.
But the sharemarket is a daunting place if you don’t know what you’re doing. Saving up for a deposit on a house takes a long time. And investing in art and fine wine is risky business.
So if you have $1000, $5000 or $10,000 sitting in a savings account, what should you do?
Kirsty Lamont, director financial of comparison site Mozo, says it depends on your goals. If owning your own home is what you want to do, you should focus on saving for a deposit.
“But if you’re happy renting and not so fussed about owning your own place you could look at the stockmarket instead,” Ms Lamont said.
The sharemarket traditionally outperforms every other investment class , Ms Lamont said.
“Right now interest rates are so low that if you’ve got $10,000 sitting in a savings account you’re just wasting that money basically,” Ms Lamont said.
If you have a savings account, in order to make up for the money you lose through inflation and tax you need to earn at least 3.5 per cent interest. And only one quarter of Australian savings accounts have ongoing rates above that amount.
Barefoot Investor‘s Scott Pape says there is no amount of money too small to invest in shares.
“Small amounts of money grow into large amounts of money. That’s the secret to becoming rich,” Mr Pape said.
“If you’d stuck a $1000 into the CBA when they first floated in 1991 it would be worth around $38,000 today, and they’d be sending you a cheque for $1,800 a year.”
But before you get too excited by the prospect of getting rich quick, there are some things you must take care of first.
Before making any investments, you should pay off consumer debts such as credit cards or car loans, says Robert Reid from RK Financial Planning.
It’s also important to keep in mind that investment strategies are long term.
“All investors will face a sharemarket crash at some point so it is important that invested funds aren’t going to be needed at short notice,” Mr Reid said.
“Similarly, ensuring you have access to an emergency stash of cash in a high interest savings account to cover unexpected expenses means you won’t have to dip into your investments.”
If you want to give sharemarket investing a go, you have two main options: investing in individual shares, or investing through a fund.
“Investing via a fund is great because it gives you instant diversification, even for a small amount, rather than putting all of your money into one share and having the success of your investment depend on whether that one company does well.”
There are two types of funds: managed funds and exchanged traded funds.
With managed funds you pay professionals to manage your money for you and invest it in what they think are the best stocks.
“You can go online to something like Morningstar which rates all managed funds in Australia. And the main things to look at there are the historical returns that the fund has generated and their fees. Fees are really important. Some can charge fees at above 1 per cent which will just eat away your money,” Ms Lamont said.
Exchange traded funds are low cost funds that generally track an index rather than being managed by professionals.
“For example they track the S&P ASX 200, which basically means you are investing in the top 200 companies in the ASX,” Ms Lamont said.
“I’m a huge fan because they have very low fees that give you instant diversification, and typically the majority of managed funds actually fail to outperform the index over time.”
If you want to invest in something a bit more cultural, such as art or fine wine, be warned that it is tricky.
“You really need to be a fine wine or art expert or connoisseur to make any sort of return on these, and consider it a hobby as much as an investment so that you get enjoyment along the way even if you don’t make money,” Ms Lamont said.
Ways to invest small amounts of money in the sharemarket
… is the minimum amount required to start investing. The reason is that amounts under $500 will have a big chunk eaten away by fees. For instance the typical share trade cost with an online broker is around $20, which is 4 per cent of $500 and double what you’d want to be paying in fees.
… could see you investing in an exchange traded fund or individual shares. If you choose to invest in individual shares, purchase one stock and buy a new one every couple of months as you save.
… would still be a good amount to invest in an exchange traded fund. If you want to invest in individual shares, build a portfolio of smaller high growth companies balanced with safer value-orientated stocks to spread risk. You could also invest in managed funds, but ensure fees don’t eat away your investment by keeping fees at around 0.3 per cent, or less than 2 per cent of your total investment.
… means you should take the same advice as if you had $5000, but it just means you have a bit more to play with.
… is an amount you could invest in the sharemarket, or in an investment property. Older apartments are cheaper and have higher improvement potential. Renovations can add value to your existing house.