• Miss Money Box

The importance of investing

There are two ways to make money: by working for it, or by getting it to work for you. As hard as you work and save, if you keep your money in a regular bank account or in an old jar in a cupboard, your money isn’t working for you.

Jar of Australian money

“So…” I hear you ask, “how do I make my money work for me?” That’s easy, by investing it.

How do you make money by investing?

Investments make money by paying out income – like dividends from shares, or by increasing in value. It doesn’t matter how you do it. Whether you invest in individual stocks, index funds, real estate, bonds, a small business or a combination of assets, the objective is the same: to make investments that generate additional cash.

What is the gender investing gap?

Women don’t invest as much as men do. And they don’t invest as early as men do, either. According to a survey by BlackRock, of all the assets women control, 71 percent are kept in cash. While cash has practically zero risk, it also has zero potential to grow over time the way stocks do. And even with low inflation, the purchasing power of that cash will decline as time goes by.

Let’s talk about investing in the stock market

You can create a brokerage account online pretty painlessly and you can get started yourself with just $500 (or even $50 if you use Commsec Pocket). You can invest in individual companies or a fund that tracks a bunch of companies.

“The technical barriers to investing have never been lower. You can get an account set up in a few days, and be a shareholder almost immediately after that. With low minimum order sizes, you don’t even need a lot of cash to get started,” says Andrew Page, CEO of Strawman.com, an online investment club for DIY investors.

“For me, the biggest barrier to understanding investing is knowledge. It takes time to figure out what you are doing and, frankly, that’s a process that never stops.”

Why should you start investing when you’re young?

Time is on your side when you’re young as you can benefit from compounding. As an example, Warren Buffett (the world’s most successful investor) generated most of his net worth after his 50th birthday thanks to compounding.

“Real wealth comes from long-term compounding, not short-term gains,” says Andrew.

Warren Buffett talking about the importance of investing to a young woman.

Warren Buffett shares the secret of compounding with a young investor.

“The other advantage to starting when you’re young is that you can afford to make mistakes. This is partly because you are likely investing with relatively small sums, and also because you have a lifetime of earnings ahead of you. Reading and researching are very important, but at the end of the day there’s no substitute for actually ‘doing’.”

New investing apps and platforms

FinTech advances in the last few years have made investing in the stock market really accessible. A recent customer insights study by automated investment service Six Park found that 25 percent of their female clients’ top concerns was not being able to invest in property in the near future. Robo advisor platforms like Six Park and Stockspot have been designed with the user experience in mind and are attractive to younger investors.

Andrew suggests doing a bit of research before using investing apps, “Those that promote good behaviour (like Raiz) can bring about a positive change to people’s wealth but just be aware of the fees you are paying. You need to ask yourself whether they are actually doing anything that you couldn’t otherwise just do yourself without too much effort.”

What about property?

Australians love property. Around 70 percent of Australians own their home and 83 percent of those also own an investment property.

If you can afford to get into the market, Andrews says there are three main benefits to buying property, “First, you never know what the price of your house really is and it’s difficult, costly and time consuming to sell — and that’s a good thing! It means that people tend to hold for many, many years and therefore don’t get in their own way with silly trading strategies.

“Second, you can live in a house — which is a type of guaranteed return, and a forced savings measure (if you are repaying a loan).

“Finally, finance costs and terms are about as attractive as you get with investing.

“I think property is a great investment, it has created a lot of wealth for a lot of people,” says Andrew.

House flying in sky

Property prices have ballooned in Australia over the last decade making stock market investing a more accessible option.

Property, like any asset, can become overvalued and you need to ensure you are paying a sensible price and employing a sensible strategy.

“I believe things have gotten a little crazy in Australia in the last decade or so. Negative gearing strategies, low-doc loans, excessive loan-to-value ratios, prices that are well beyond what fundamentals would suggest.

This doesn’t mean a crash is imminent (though that’s a possibility), but it does mean that future returns (say over the coming decade) are likely to be well below what we’ve seen in the past ten years,” says Andrew.