Why it’s Easier than You Think to Start an Investment Portfolio

Over the past few weeks, one topic in particular has been popping up in conversations with my friends. That topic is what to do with money. As Gen Y-ers, we’re just starting to make enough money to not be broke by payday. We can even pay off debt, save for holidays, or spend money on entertainment.

We know that investing in the stock market is a thing that people do. We know that’s how a lot of people have made their fortunes. But many Gen Y-ers still don’t realise that it’s not exclusively for people who have millions of dollars to start with. Some hear the phrase ‘stock market’ and think of Jordan Belfort, (slightly rude) stockbroker stereotypes, or business guy memes.

wolf of wall street jordan belfort
Source: Forbes
[Click to enlarge]

Plenty of young people don’t realise that, in 99% of transactions, and 99% of market organisations, it’s nothing like that.

Why most baby boomers don’t own shares

The thing is, this misperception problem doesn’t just apply to Gen Y-ers. It applies to anyone who’s never been active with growing their wealth. At least when it comes to equities. There are plenty of Gen X-ers and even baby boomers who don’t own any shares — except by degrees via their super fund. Unless you travel in certain circles, investing via the stock market isn’t exactly the norm.

The persistent myths about starting to invest

  1. Professionals are only interested in serving the very wealthy

Maybe that’s true for a small number of firms. Firms that market themselves as providing exclusive services for those with a minimum amount of capital to invest — $250,000, $1 million, $10 million.

But those firms are the exception, not the rule. There are many more companies that offer scalable professional assistance solutions. ‘Scalable’ means you only pay for what you need, even if all you need is a no-frills, bare-bones service. For example, if you simply want a brokerage service with occasional tailored news updates, an online service may suit your needs.

And often, your bank will be happy to help you set up a trading account. The way they see it, if they serve you well with one product, they have a better chance of selling you another product.

  1. It’s only safe to buy the top 20–50 stocks on the ASX — and they’re too expensive

There are a few things wrong with this statement. First, some people don’t understand the definition of ‘top’. Stocks on the ASX are ranked by market capitalisation. That’s how much the market thinks their worth, as the share price times the number of shares. ‘Top’ doesn’t mean the fastest growing ones, or the ones with the biggest dividends.

Second, not all stocks in the ASX 20 have a high price. For example, some cost less than $10. Even the high priced ones are not necessarily ‘expensive’. It’s less about price, and more about value. And value is made up of a lot of different things.

  1. You need expert skills or connections to invest successfully

Wrong. Market rules and regulations are designed to level the playing field so that the average person can make fully informed decisions about the trades they make. That’s why things like insider trading — using secret knowledge to your trading advantage — are criminal offences with serious penalties attached.

You don’t need a degree in commerce or economics to research a stock. You just need to know what you’re looking for. There are plenty of free resources to get you started. Depending on where you’re based, you may also be able to take an in-person course on how to read a chart, or how to interpret a company report. Just be wary of ‘free’ seminar providers promising to make you an instant millionaire; chances are, you’ll just be in for the sales pitch of a lifetime.

  1. Investing in stocks is like gambling — chances of a win are similar

See above. If you take the time to educate yourself and do your research, your chances of coming out ahead are pretty good. Legendary investor Warren Buffett put it best:

You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.

  1. You can’t beat the big guys

Ever look at your superannuation fund report and think, ‘what the hell? I thought these guys were meant to be the professionals — how did they make so little?!’ You’re not alone. Many people also wonder how a beginner could ever make money, if the so-called pros only grew their wealth by 3%.

The thing is, there are lots of reasons why big institutional investors (like super funds) might not make a lot of money. In many cases, they’re the same reasons you actually have an advantage.

For example, most high growth stocks are small-caps. These are little companies with a relatively low market capitalisation. ‘Market capitalisation’ means the total market value of all the shares in a company.

Small-caps are relatively illiquid. This means there aren’t many shares bought and sold at any one time. Possibly because there aren’t many shares in existence. Or because most of the shares are tightly held by a few individuals. This means they’re hard for big investors to buy and sell in a timely manner. At least, hard to buy and sell on a scale that would be worthwhile in terms of their time, transaction costs, and benefit to their clients. Most big firms don’t even look at small-caps.

This means you’ve got a chance to get in first, and buy these small-cap stocks before they hit the mainstream’s radar.

By the way, if you’re interested in finding out more about small-caps, check out Money Morning editor Sam Volkering’s free report. In ‘The At Home Investors Guide to Profiting from Australian Small-Caps’, Sam explains the features, benefits, ins and outs of small-caps in simple straightforward language. It’s a must read for those who are new to investing. Especially those who don’t think they can make much with their modest starting balance. Make sure to find out how to download your free copy.

So who does own shares?

There is a wide variety of research on the topic of Aussie share ownership. However, lots of it focuses on share ownership in relation to other data. For example, wealth studies and demographic reports may show shares as a component of overall household wealth. Or they might talk about the average portfolio, and what types of shares people own.

One useful source of info is the ASX’s annual report, ‘The Australian Share Ownership Study’. They just released the latest version in early July, covering last year. It’s available here if you feel like reading all 50-odd pages.

According to the ASX, 33% of all Australian adults directly own listed investments.

That number has fallen in recent years. Back in 2004, 44% of Australians invested directly.

Only 49% of investors consider themselves to be knowledgeable about the market. 46% seek continuous learning, to help them make better decisions.

The Study found that most of those investors didn’t start owning shares until they were in their mid-30s.

incidence of share ownership by age
Source: asx.com.au
[Click to enlarge]

The Study included a number of insights into ‘non-investors’ and ‘potential investors’. Some findings seemed obvious, some were shocking.

43% of people who don’t already directly own shares, think that a lot of money is needed to invest in the share market. 56% expected to need an expert to guide and advise them, but 40% believed their capital was too small to warrant a broker or adviser’s full attention.

Around 5.58 million potential investors are interested in the share market but are either disengaged, confused or undereducated, or feel that there’s some other factor standing in their way.

5.58 million. That’s a lot of people missing out — potentially for all the wrong reasons.

The Study divided potential investors into four groups; reluctants, rejectors, tentatives, and keens. The ‘keens’ were those who were engaged, interested, and had a little knowledge of how the market works. There were 2.52 million of them. Hundreds of thousands more are near retirement age, or have recently retired. You can see from the chart above that the incidences of share ownership actually drops off between the ages of 65 and 74.

Why is this? Do some people get to a certain age and sell their shares? Or do they not own shares in the first place, and think it’s too late to start? The latter seems more likely. 37% of non-direct investors think that you can only succeed in the share market if you invest for the long-term. That either represents a huge misunderstanding of what ‘long term’ means, or a huge misunderstanding of the diversity of opportunities available.

The Study didn’t cover it, but there are also lots of sources out there telling older people not to invest in shares. Conventional wisdom says shares are too risky for people who need, or will soon need, a reliable income-generating asset. For example, the ‘life cycle investing’ theory says a person’s investments should shift away from stocks the older they get. It’s based on the idea that most people want to invest to fund their retirement.

vanguard lifetime investment chart
Source: advisors.vanguard.com
[Click to enlarge]

Take a look at the chart above from US investment firm Vanguard. For those of retirement age, it suggests a pretty conservative portfolio allocation. This makes sense if you want to preserve a certain amount of your wealth, for security in retirement. But many people are already comfortable with their retirement wealth. They want access to exciting growth opportunities to fund little luxuries in life. Or to leave a little extra to their families.

Personally, if I were older than I am now and looking to start getting active with my investments, that would put me off. I’d be inclined to think that investing under 20% of my modest starting balance wouldn’t really be worthwhile. But that’s just me.

What people choose to spend their money on instead

There is one particularly prominent reason that people of all ages hold off on investing in stocks. That is, they don’t think they have enough money.

The problem is their concept of ‘enough money’ is flawed. As discussed above, the stock market isn’t an exclusive club for people who are already wealthy.

Some people look at the returns possible with their starting capital and think investing isn’t ‘worth it’. As in, they won’t get a big enough return on their investment. But they’re not putting that projected return into context. Even passive, conservative investing can get you a better return than, say, the average savings account at a bank.

Many people don’t realise that the minimum trade on the ASX is $500. You don’t have to invest tens of thousands to get started. And you usually don’t have to pay a percentage-based commission to a broker, either. It’s just a flat fee for facilitating the trade. Online brokers may charge as little as $9.90, though the average is more like $20.

You could buy your first parcel of shares for as little as $520.

Buying your first parcel of shares is an important step in getting over any fear or confusion you may have about investing.

Of course, the more you invest in any one trade, the lower your transaction costs will be. For example, if you invest $500, and pay $20 to your stockbroker to do so, your transaction cost is 4%. But if you save up a bit longer and invest $1,000 in one go, it’s only 2%. If you buy lots of small parcels of stocks, your gains could be wiped out by your transaction costs. But again, that depends on the stocks you choose to start with.

According to the Share Ownership Study, the average value of a trade is $11,836. But that doesn’t mean that’s the median first time investment. There isn’t much official data on first time investments. But if there were an official number, it would likely be somewhere between $500 and $11,000.

There are many, many other discretionary items that average Aussies buy in that price range.

For example, there’s holidays. According to data from Westpac, Aussies who go overseas spend an average of $4,679 per trip. That number is only likely to get higher as the dollar gets weaker. Unless people decide to have drastically shorter holidays. Interestingly, research from TripAdvisor says Aussies plan to spend around $14,900 on domestic and international holidays in a year. But only about 67% actually book an overseas trip at all. This suggests that holidays abroad are a high priority for many people. At least in an aspirational sense.

There’s also luxury goods. According to ASIC’s MoneySmart, most Aussies spend around $0.80 to $1.00 per week on perfume. Households spend around $32 a week on meals in restaurants. According to the latest available data from the ABS, households also spend nearly $12 a week on confectionery. That includes $3.56 on chocolate.

You may not realise what you’re spending your discretionary income on. But once you identify how you’re prioritising spending, it’s easier to cut back and save. And then to grow those savings by starting a portfolio.

How to actually start a portfolio

Money Morning publisher Kris Sayce has summed it up pretty well in his report ‘A Beginner’s Guide to the Stock Market: How to Buy and Sell Shares’ — available here for free.

Greg Canavan also wrote an awesome article about it ‘how to start an investment portfolio’ here 

This exclusive report is a must-read if you’re after a clear, step-by-step guide to buying and selling shares. It’s the ultimate unbiased, no-bull starters’ guide. In this report, you’ll discover the one type of stockbroker you should never use. You’ll also find out the number one biggest mistake that most new traders and investors make. Hint: it’s to do with how you sell the shares.

In essence, you really can do it yourself. No more excuses! Click here to find out how to download your complimentary copy of the Beginner’s Guide.

Eva Mellors,
Contributor, Money Morning

Money Morning Australia