Six Tips on How to Set Up Your Investments
How do I invest?
That’s the most common question I get asked when people find out what I do for a crust.
Despite there being lots of free information on the internet, most people just don’t know where to start.
You know why?
The free information is confusing.
Most ‘free’ information ends with an invitation to meet with a financial adviser.
You know what happens when you meet with a financial adviser? You end up with the exact same information as everyone else.
Very rarely is that information tailored just for you.
And here’s the thing: You can take control of your investments. You just need to know where to start…
Ignore the jargon
There’s so much nonsense in the financial industry.
I should know; I’ve worked in it for over a decade now.
Most websites with free financial information are filled with jargon. Stuff that you can’t understand without googling every second word.
In fact, a large portion of the financial industry in Australia is about drawing you in…and then convincing you that you can’t manage your investments alone.
That’s utter nonsense.
You are the best person to decide how to spend your money.
The problem most people have, is how to go about setting up your own stock portfolio.
Most people don’t know where to start. And if you went to see a financial planner, they’d hand you a slightly tweaked version of the same stock allocation they give everyone else.
A stock selection heavily skewed towards the big banks, a telco perhaps, a couple of mining giants and then maybe Australia’s second-biggest technology stock.
Then, they’d send you on your merry way, telling you that you have a balanced portfolio.
I have a different idea to that.
And with a few simple steps, I’ll show you how to set up your own investing portfolio…without spending a cent…
A different type of portfolio
So, how do you get started?
Believe it or not, it’s fairly simple to get going.
The first thing to note is that a stock-heavy portfolio isn’t a balanced one, regardless of how well spread out the stock investments are.
While investing in shares is a useful tool to kick-start growing your wealth, it isn’t the be-all and end-all of investment ideas.
Instead, I suggest you consider spreading your cash out like this…
- 50% of your cash into stocks
- 10–20% into gold and silver bullion
- 10–20% into cash
- 10% in bonds
- 10% ‘fun money’
That seems doable. But how do you go about picking stocks? Well you might know more than you realise…
Keep it simple
Often, picking stocks is the most daunting part for investors. Buying cash and gold seem like the easier option.
It’s not. It’s just about getting over the hurdle of understanding the financial jargon.
One guideline to follow when you first start out is to stick with what you know.
When it comes to buying and selling shares, most analysts will suggest you trawl through company financials and market updates.
That’s a great method for people who already understand the stock market.
But not everyone enjoys reading those sorts of things. And sometimes, going through pages and pages of numbers actually puts people off.
I do it for a living and there are times when I want to pull my hair out reading them. Financial reports aren’t fun.
Investing on your own should be enjoyable, not a chore.
The key to managing your own investments is to pick a business you understand.
I have one rule when it comes to selecting stocks: If the company can’t explain what it does in 10 words or less, ditch it.
This approach has rarely failed me.
Complicated businesses spend more time talking to the market than doing the things they claim to do.
Not only that, with their interests scattered in multiple directions, they can’t focus on what the core of their business is.
Conglomerates like Wesfarmers Ltd [ASX:WES] and Woolworths Group Ltd [ASX:WOW] have multiple businesses, yet both can explain their business in simple terms.
The power of what you know
Step one: Rule out any complicated businesses.
The follow-up to that is to pick stocks you know.
I once had a woman write to me, explaining that she bought share in Ansell Ltd [ASX:ANN] based on her global experience as a nurse.
She had travelled the world. Worked in every top hospital you can think of. Top US private hospitals through to third-world, makeshift medical sites.
Through all her years of working, she explained to me that every single hospital she worked at had a box of Ansell medical gloves.
Then, she took this knowledge and researched Ansell’s financial background a little more, before taking the plunge.
This example shows how you can take your profession and apply that knowledge to certain stocks.
I have heard stories of fly-in, fly-out mine workers buying shares in mine recruitment companies…or investing in businesses that provide remote power generators and other plant and equipment, for example.
The point is to take advantage of your own knowledge.
You might not feel like you understand the stock market.
But chances are you understand your industry. Take that knowledge and apply it to stocks listed on the ASX.
Learning the lingo
Now you have your starting point.
Next up is a bit of due diligence.
You actually don’t need to get too bogged down in the financial details of the companies you’re considering investing in.
Look to see if a company is profitable against how much debt it has. Is the company’s net income slowly increasing?
If so, chances are the company is still growing. This means the share price should go higher as the profits grow.
Both Google Finance and Yahoo! Finance provide free basic financial data. And chances are your stock broking platform will have this information too.
And over time, the more research you do, the less intimating the jargon will be.
Blue chips aren’t always the answer
Once you’ve become comfortable with owning a couple of shares, then you can start to widen your investment scope.
The ASX has more than 2,000 listed stocks.
You don’t need to stick to the top 20 blue chip companies in Australia. In fact, that’s exactly what a financial planner would likely do — pop most of your cash into the top 50 companies in Australia.
Rather than go and dump all your money into blue chips, consider spreading your money out against the market.
Pick a couple of blue chip stocks that pay a high dividend. This is where the top 20 are useful.
Rather than focusing on capital growth — the shares going up in value — look for companies that will provide you with some sort of income.
Then, spread the rest among mid-size to smaller companies.
Outside the top 50 is where your career knowledge could be useful.
For example, if you’re a mechanic by trade, you may be willing to invest in a car parts business.
There are some incredible companies outside the big banks, a telco, the supermarkets and a mining giant or two.
The point is to take advantage of your own intrinsic knowledge and apply that to the stock market.
And the final point for today is to remember that there is no such thing as a ‘set and forget’ portfolio.
That’s a quick way to end up exactly where you start. Or, worse, broke.
That doesn’t mean you need to watch the market every day.
However, you should review your portfolio frequently to make sure you’re on track. Once a month, check in on the companies you have bought shares in. Also, the more frequently you review things, the more comfortable you’ll become with market movements.
Until next time,
Editor, The Daily Reckoning Australia
PS: We’ve been tracking the US election closely. It might be hogging the headlines, but does it matter for Australians? Check out our most recent interview over at The Daily Reckoning Australia YouTube channel to see what our experts have to say.