The ‘Other’ Stuff You Need to Know about Investing
When people find out what I do to earn a crust, there are two questions I almost always get.
‘So, ah, where should I put my money then?’
And often, this is quietly followed by, ‘er, how do I invest?’
While for some people investing is second nature…others were never taught how to get going.
And once you start wading through the free information on the internet, it often feels overwhelming.
Financial literacy is something some of us learn at home. Whereas others have to struggle through and work it out as they go along.
But we can make it easier on those middling through, by sharing some of the basics.
Many people are interested in financial events, but are still not sure where to start when it comes to preparing their own investment portfolio.
I remember what it was like to be daunted by this.
And you know what?
I’ll bet there was a time when fund managers and stock brokers felt the whole financial world was too big to know where to start.
They just don’t like to admit it now that they are masters of the financial universe…
Avoid cookie-cutter advice
The most important thing to know when starting out is that you can do this on your own.
By doing thorough research, and taking the time to plan your investments, you can avoid paying a fortune for financial advice, which often results in ‘cut and paste’ investment information anyway.
The financial industry is heavily geared towards confusing you with a bunch of terms no one in the real world uses.
It’s designed to draw you in, leaving you to believe it’s ‘too complicated’ and best left to a professional.
In other words, the entire $4.6 billion financial advice sector rests on convincing you that it’s too hard to understand.
That’s not the case.
Once you get past the jargon, you’ll surprise yourself with how quickly you adapt.
Earlier in the week, I showed you how to get started with stocks. What to look for, and how your career can be useful when it comes to picking stocks.
Today, let’s round it out by looking at what other investments you can include…
Don’t throw everything into stocks
A balanced portfolio is one that invests across many assets…not just stocks.
That’s why I believe investors should consider splitting their money like this:
- 50% of your cash into stocks
- 10–20% into gold and silver bullion
- 10–20% into cash
- 10% into bonds
- 10% ‘fun’ money
To long-time readers, it will come as no surprise that I advocate an allocation to physical bullion.
Not gold or silver exchange traded funds, but the actual metal you can touch.
Why? Gold is like an insurance policy. It can’t be manipulated or devalued. The purchasing power of gold endures over decades of central banking policies.
Let’s look at it a different way.
A decade ago, I bought a very fancy suit. A grey, pinstriped little number that blended in with my financial market surroundings. (I was a walking cliché, but that’s a story for another day.)
That suit cost the same as an ounce of gold in 2008. If I were to buy that same suit today, it would still cost me an ounce of gold.
You see, the price of gold doesn’t go up. It’s the value of your dollars that goes down.
That’s why the cash in your wallet buys you less…yet gold can buy the same thing many years later.
The follow-up to this is, ‘How much gold and silver should you hold?’ Well, again, the exact ratio is up to you. Silver is much cheaper to buy at $26 per ounce, so it’s a lower cost way for new investors to start with bullion.
If you want to have both gold and silver bullion, aim to have about $1,000 worth of silver to $10,000 in gold.
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 of 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.
Choose a couple of stocks that have a high dividend. 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 midsize 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 started. 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.
Cash is king
Aussie tradies are right.
Cash is king…and crucial to any investor’s portfolio.
People have been conditioned to think that their money needs to ‘work’ for them. And that cash at the bank is simply money doing nothing.
Again, that’s a myth.
Cash in the bank is power.
While it might not be earning a lot of interest, cash on hand gives you the ability to be nimble. The chance to seize on a good investment when you see it.
Having a portion of cash as part of your portfolio enables you to move with the market.
Some people like to keep a bigger buffer than others, depending on the stock market conditions.
Another conservative investment idea is to add bonds to your portfolio.
Now, Australian government bonds aren’t available to ordinary investors.
However, you can buy what’s called exchange-traded Treasury bonds on the Australian Securities Exchange (ASX).
They are relatively straightforward.
You buy and sell them on the ASX, like you would shares. Plus, they pay a yield (the ETF Treasury bond coupon interest rate) twice a year.
These tend to be considered a conservative type of investment.
The slightly riskier version to ETF Treasury bonds is corporate bonds for the top 30 or so Aussie companies.
If you do want to go down this path, definitely do your research. You can start here with ASIC’s own guide to accessing Australian corporate bonds.
Investing for future you
Finally…that brings me to ‘fun’ money.
What is fun money when it comes to investing?
Treat this pool of money differently to your cash allocation.
The fun investing money doesn’t have to be about something that will bring you a financial reward immediately.
This is the money you set aside to invest in ventures you think could be a good idea.
Maybe a small amount could go towards a great start-up idea a friend has in return for some interest in the company.
If you are going to put money into a friend’s venture, don’t be afraid to get some legal documents drawn up in the process.
A couple of hours spent on legal fees can drastically change any long-term outcome.
‘Fun’ investing money could be used in your community, on art…or on yourself.
We spend so much time thinking that our investments must make even more money that we forget the whole point of investing is about protecting ‘future you’.
Sure, future you does need to be taken care of financially.
But you still need to get yourself there.
Investing in ‘things’ that may not provide a financial reward is all part of the process.
Until next time,