Where Should I Be Investing to Set Myself up for the Future?
This article is based on a TWSG podcast.
You may think, I don’t need to be a multimillionaire; I just want to make sure I’m doing the right thing now because everybody tells me, “you start early, and everything ends up well”.
But that’s only part of the puzzle.
So, what should you be doing?
To set yourself up for the future, it’s not just a question of where to invest. There are three aspects: when to invest, how much to invest, and where to invest.
Let’s walk through them.
How should you invest?
If you have a little bit of money, the worst thing you can do is to place it immediately on the market. The other lousy alternative is getting scared and not putting anything into the market, and you slowly build up cash.
Most investment experts will tell you that cash is the worst investment. Now, I don’t mind cash for a little bit of patience. I think that’s a good trade. But cash investment is not a good strategy.
When you’re hoarding cash and not putting it into investments, what you’re actually doing is trying to time the market.
Timing the market is trying to pick the lows to buy and sell on the highs. How do you know?
You should never say, “I can time the market”.
Market timing is impossible.
You can never invest at the perfect time. It’s the equivalent of saying, “I can predict the future.” It’s not just tough; it’s impossible.
So, what should you do as an average investor?
The best thing to do is dollar-cost averaging. You need to start drip-feeding your money into an investment. For the best results, you should drip-feed your money a small amount at a time every week.
If you’re hoarding the cash and you’re trying to predict the market, you’re far more likely to invest high, and sell low because you’re likely to get overexcited about the market, then get very scared. You don’t want to do that.
But when you’re dollar-cost averaging, you’re slowly going to get the average of the market. You won’t pick the lows, and you won’t pick the highs, so you’ll get some averaging over that period.
That means your returns won’t be the absolute theoretical best possible, but they will be close and much more likely to make money over the long term.
If you looked back over the last 20 years and just picked the perfect point you could have invested, your returns would have been fantastic. But nobody could have determined that with any certainty.
So, you slowly drip-feed it over time.
Because one thing history has told us, again and again, is the stock market goes up over the long run.
As a country, as individuals, and as communities, we progress, and we move forward.
The country and the economy expand, and your investments grow with it, particularly if you’ve chosen a broader index.
So, invest over a long period and drip feed in those accounts. That’s how to invest – dollar-cost averaging.
How much to invest?
This is a very individual thing, but there are specific ways to think about it.
Don’t invest so much that it’s causing you day to day pain financially.
If you’re putting so little in that you don’t even notice it, that’s good, but there should be a balance. Not too much, not too little.
For the typical investor, that’s about 10% to 15% of your wage. It shouldn’t be too much less or much more.
Interestingly, that’s just about where your superannuation sits.
In Australia, your employer will be investing 9.5% of your wage into a superannuation account. That money is then invested.
If it’s not too painful and doesn’t cause you any day-to-day cash flow problems, I strongly suggest that you start thinking about topping up your super.
There are tax-efficient ways to top up your super.
So, add to your super regularly. Do it for 30 years, and you’ll be absolutely fine. Actually, you’ll be more than fine; you’ll be incredibly well off.
Where else should I invest?
Let’s look at 20 years, from 1996 to 2016.
In Adelaide, in 1996, you could have bought a house for $137,000. Can you imagine that? In 2020, the median house price was $564,000.
That’s a 330% return!
If you bought that average house in 1996, in 2016, you would have made $479,000 on your investment.
Now, imagine instead of buying that house, you put it in the stock market.
Today that $144,000 in the ASX400 would be worth $822,000 or 471% profit with a $678,000 return over 20 years.
Now, there are little nuances to this.
The positives: the great thing about stocks, and why I like stocks, is they’re incredibly liquid. You can sell them any time.
When you’re selling your house, it could take many months, and it’s stressful.
Stocks can be instantaneous to take out your returns.
Financial experts always point out that stocks consistently outperform houses (as in the figures above).
But with real estate, you have leverage.
You see, you didn’t put $144,000 on that house, did you? Probably not.
You probably put $30,000 down. That means that your returns are much more significant, particularly with the low interest rates on mortgages.
But if you didn’t buy the home outright, you have been paying more—you’ve been paying interest.
Leverage makes a difference. Now, don’t read this and think you can leverage stocks. I always tell people, do not leverage stocks. Leveraging stocks is a dangerous game.
But with housing, you have leverage—you have control over many assets with a small amount of money.
On the other hand, when you first get a mortgage, it’s almost all interest.
The principal doesn’t start coming off until the end of the loan. So, you’re just paying interest payments and not paying off your house. Once that’s considered, that puts a tick back into the pro-stock group.
And think about it, you must live somewhere—so you should have a house. And it’s better to be paying off your mortgage than someone else’s.
Anybody can invest on the ASX without knowing the companies. Investing in an index is an excellent option for beginner investors because stock indexes will increase in value over an extended period.
So, both real estate and stock market indexes are great options. But, depending on your personal circumstances, one may be better for you. That’s why it’s essential to talk with a professional financial advisor.
To invest for your future, remember…
- Don’t invest all your money at once—slowly drip-feeding into your investment account will get you better returns in the long run.
- Invest 10% to 15% of your wage—this amount is highly variable and dependant on your personal circumstances.
- Boost your super—invest more money by contributing to your super.
- Consider investing in real estate—if you can afford a full deposit, you should be paying off your own home, not renting.
- Consider investing in the ASX—indexes are an excellent option for stock market investing.
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This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.
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