I bought my first shares in the stock market in my mid-20s. I was nervous and excited. Having grown up with a father who loved trading and speculating, I’d been preparing for the moment since the 90s.
I saved up a decent amount of cash, chose a company that I really thought was a solid investment, created an online brokerage account and took the plunge.
That company was Pumpkin Patch children’s clothing – the label of choice for aspirational mothers everywhere.
At its peak in 2007, Pumpkin Patch was the darling of the New Zealand stock market. It was valued at around $800 million with hundreds of stores in Australia, New Zealand and around the world.
Every kid in the playground was wearing Pumpkin Patch. How could I go wrong?
Well, I did go wrong. In 2016 Pumpkin Patch went into administration, closed all its stores and I lost all my money.*
Where did I go wrong?
To be honest, given my young-ish age and level of experience, I did all I thought reasonably possible to research the company before I bought shares in it.
- I did a lot of Googling.
- I bought a book that utilised pink typography called ‘Shopping For Shares: The everyday woman’s guide to profiting from the Australian stock market’.
- I read stock forums which analysed candlestick charts that I tried really hard to understand.
- I consulted my dad whose extensive and well-considered comments included “Yeah, solid bet”.
- I got really into reading the Financial Review.
As you can tell from the above list, in my younger years, I was super cool.
In 2016 when Pumpkin Patch totally tanked, I wasn’t distraught and looking at securing a cardboard box under a bridge, I was fine. Kind of annoyed, but fine. Why? One word: diversification.
Why is diversification important?
Pumpkin Patch wasn’t the only stock I owned. After 10 years in the game, I had acquired a solid portfolio (they don’t call me Miss Money Box for nothing), and while I lost on one, I had won on others.
I had stocks in a range of sectors including healthcare, financials, consumer staples and technology.
The stock market is inherently risky, but you can offset that risk through diversification. These days, I honestly don’t have the time, inclination or mathematical prowess to think about individual stock picking anymore.
Wait, I actually never had the mathematical prowess.
There are easier ways to buy into a diversified range of shares at one time and spread your risk without trying to understand a candlestick chart.
Diversify the easy way
Investing in a fund gives you instant diversification over a number of industries and companies. Let’s consider some of the options.
Option one: Exchange Traded Funds (ETFs)
ETFs are ‘passive’ investments that track an index, like the S&P ASX 200. They generally do not try to outperform the market and will go up or down in value in line with the index they are tracking.
ETFs aren’t actively managed by a fund manager so their fees are low. There are plenty of ETFs to choose from and you can buy them like you’d buy individual company shares. You can also buy ETFs from one of the big ETF investment management companies directly, like Vanguard.
Option two: Managed funds
Managed funds are run by, you guessed it… a fund manager. You pay these professionals a fee for their expertise – and you will, their fees can be high. Before getting involved in a one of these, find out which are performing well over time and their fees.
Managed funds generally need a bigger initial investment of around $5,000 however, some will let you start with $1,000. Personally, I’m not a big fan of managed funds as they continually try to beat the market by taking a short-term view.
Option three: Listed Investment Companies (LICs)
Many LICs operate in a similar way to a managed fund. They are run by a fund manager who is responsible for selecting and handling the company’s investments.
The fund is a closed-end investment which means if shareholders wish to leave the fund, they can sell their shares, without affecting the number of funds under management. This process allows for the management to take a more long-term approach to investing. You can buy and sell LICs on the ASX just like regular stocks. LICs are the Barefoot Investor’s fund of choice.
Before you dive into the market check out these little gems:
- How do you buy shares?
- Should you buy shares?
- How to (properly) research which shares to buy (by MoneySmart).
*In 2017 the Catch Group relaunched Pumpkin Patch as an online store after acquiring the company’s intellectual property. My money was still gone though.