The stock market can be an intimidating place. Just figuring out how to buy shares and then trying to decide which ones to buy is a bit more serious than a trip to the shops to buy toilet paper. If you’d like to get into the stock market, but consider yourself a novice (and would rather sleep in than research individual companies), investing in Exchange Traded Funds (ETFs) is a great way for newby investors to get exposure to a broad range of companies or industries at once.
WTF is an ETF?
Essentially, ETFs are a one-stop-shop for diversified investing. ETFs can be bought and sold through an online brokerage account exactly how you’d buy shares in a single company. ETFs track indexes or groups of assets, for example, the top 200 companies on the Australian Stock Exchange (ASX).
There is a huge number of ETFs listed on the ASX that you can buy yourself. ETFs track all kinds of indexes, in Australia and internationally. They also track industries such as banking, energy, healthcare, consumer staples, telecommunications as well as property, bonds, currencies, commodities and precious metals. Unlike managed funds, they don’t require a huge initial investment. Managed funds generally require upwards of $5,000 to start and they have much higher fees.
“Stock picking is difficult, hoping to make big bucks trading individual stocks is a bit like gambling and is a risky approach to investing. Buying and holding stocks in individual companies lacks diversification, if you buy Telstra or Woolworths your money is very concentrated, you’re not spreading your risk. We use ETFs because they give clients a diversified investment to entire markets, asset classes and geographical regions so you’re not just confined to Australian shares.” Chris Brycki, founder and CEO of Stockspot.
Don’t believe me, believe Warren Buffett
In case you don’t know, Warren Buffett is pretty much the guru of the investment world. As CEO of conglomerate Berkshire Hathaway, he is known for his finance savvy as well as his philanthropy. He’s done so well with his investments over the years, that whatever Warren does, others follow.
Buffett believes that non-professionals should invest their money in low-cost index funds. He is on record as saying that upon his death, 90% of his wealth should be invested in one index tracking ETF – the S&P 500 – which tracks the 500 biggest companies in America. Why? “long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”*
How much should I invest?
You can start investing yourself through an online broker with a minimum of $500. However, you’ll need to factor in that each time you buy, you’ll be hit with a brokerage fee of around $10-30. With this in mind, it may be worth saving up a bit more before taking the plunge. If you don’t have that kind of money at hand, another option is to invest your spare change from your everyday purchases using the Raiz app. Raiz is one of a growing number robo-advisors who invest in ETFs for you.
Get a robot to do the hard work for you
For a fee, robo-advisors invest, monitor and rebalance a portfolio of ETFs for you and allow you to top up your investments over time. Through an online questionnaire that queries your investment goals and appetite for risk, the robo-advisor’s algorithm provides you with a mix of the best investment options to meet your financial goals.
Robo-advice is relatively new in Australia, with seven companies currently in the market. If you have a bit of money saved up, you could choose to utilise Stockspot or QuietGrowth which require a minimum starting investment balance of $2,000. There’s also Six Park, which requires a minimum of $10,000.
Before jumping into investing, I suggest you check out my previous post about what shares are, whether investing is right for you, and how the stock market works.
With house prices unaffordably high in many areas and banks offering low interest rates on savings accounts and term deposits, stock market investment presents an alternative to growing your wealth.
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*Berkshire Hathaway, letter to shareholders, 2013, p. 20.