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Happy Australia Day everyone!
Hope we are all taking the time out to spend it with our loved ones.
This weekend also coincided with the Chinese Lunar New Year so it was a doubly joyous occasion for The Frugal Samurai household. Happy New Year!
Australia Day also marks the time when the year starts to kick off again in terms of activity and work.
The Christmas and New Year slow-down period is firmly in the rear-view mirror, and it’s time to get back on the horse.
It’s also the time when we reflect on our New Year resolutions and see how far (or not) we have come.
If you had a resolution to kick-start your personal finances, but have yet to do so, then don’t fret! This post should have you covered.
One of the reasons which you may have not started is because finance and investing can seem very daunting.
Where to begin? How do I do it? What should I do?
These questions are why I’ll introduce 3 quick and easy portfolios anyone can start in the most common asset classes: shares, ETFs and real estate.
Investing In Shares
You probably heard of this one before, and most likely know people who have invested in shares.
But how do you do it?
Step 1 – Open an account
The very first thing you should do, is to open up an account with one of the brokerage firms.
You can find a more comprehensive list here: https://www.canstar.com.au/online-trading/
Step 2 – Fund the account
So you’ve sent in your paperwork and the accounts been opened. Great! You’re ready to go.
But first, you need to fund your account.
Most firms these days require you to link a nominated account for your investing, so you should be able to do this when you’re setting up the brokerage account.
This way, any buy and sell orders are debited/credited into this account directly.
Step 3 – Get investing!
Now you’re ready to dip your toes in!
But what to buy? And when to buy it? That’s the million dollar question. (The 2 million dollar one is when to sell).
If I could tell you this, I wouldn’t be sitting in my mum’s dark, mouldy basement in boxer shorts typing this out (I lie, I’m not wearing anything).
This step you’ll need to figure out for yourself.
However, there are tons of material out there to learn from.
But the absolute key to investing can be summarised by the King himself (Warren Buffet).
“Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten and twenty years from now”.
In other words:
Find a simple business with strong growth prospects and buy it at a reasonable price.
Investing in ETFs
If you think trying to find simple businesses with good growth potential is like finding needles in a haystack, then do what most of us do – invest in all of them.
Welcome to the world of passive investing.
Which is just investing in an index, or a basket of indices.
Steps 1, 2 and 3 – Same as above
Yep, investing in ETFs is pretty much the same as investing in direct shares.
Except this time, instead of searching for BHP or CBA or CSL, you can search directly for the ETF.
Names such as iShares S&P 500 ETF (which tracks the S&P 500) or SPDR S&P/ASX 50 fund (which tracks ASX50) or Vanguard Australian Property Securities Index (which tracks the Australian property securities index).
As you might have noticed… their name pretty much tells you what they are invested in.
Which one is best?
There’s often no “best” index for you, as you are just buying into a certain sector.
For example, if you think the S&P 500 will do well, buy an index which tracks the S&P 500 performance.
Same as with the ASX 50 and the Australian property securities index.
You get the drift.
Of course, you might have picked up, if all you are doing is hugging an index, then it makes sense to pick one with the lowest fees.
And there are some incredibly low ones out there… some as low as 0.03% or 0.04%.
That’s $3 or $4 charged for every $10,000!
Again, our good friends at Canstar allows you to search for a suitable ETF you are comfortable with.
Investing in Property
As Aussies, we are a nation of property nuts.
You read it in the newspapers, you see it on TV, you hear it at the office water cooler talk.
You can’t get away from it.
I’ve always found this fascination amusing, more so because there is a real emotional attachment to the property industry. Everyone has an opinion of whether it is going up, down, sideways or even upside down.
Here is how big the market is compared to some of the other asset classes:
So how do you do it?
Step 1 – What’s your budget?
The main difference with purchasing property and everything else, is that you typically need to borrow money from a lender/bank in order to do so (you can with shares as well, but most people don’t).
This means you need to determine how much your lender can loan you.
The lender will then determine your borrowing power based on your level of income and existing debt.
There are many borrowing power calculators you can use online to get a rough guide.
Step 2 – The deposit
Typically the bank lends you 80% (in a few cases, a bit more) of the property value.
This means the remaining 20% you need to come up with yourself.
Simply put, there’s no point looking for a property for $500,000 if the bank can lend you $400,000 but you only have $50,000 available… what about the other $50,000?
By determining how much deposit you have ready, determines the price point of the property you should be searching for.
Step 3 – Pre-approval
Many experts recommend you obtain pre-approval for your loan, which states out how much they can lend you.
Personally, I’ve found pre-approvals to be a waste of time and a needless hit on your credit score.
This is because any mortgage broker or bank lender worth their salt should be able to tell you how much you can borrow at any point in time.
The pre-approval usually only lasts for 3-6 months and has certain conditions attached – such as the type of property allowed, no changes in your existing circumstances, or no changes in the property market.
I know many cases where the prospective buyer has come unstuck going for formal approval, despite holding a pre-approval.
(If you want to read more, I wrote an earlier post here).
When you’ve found a property – make it subject to finance, and go for unconditional approval instead.
Step 4 – Buy a property!
Most people love this process.
Once you believe you have found a suitable property, you contact the agent, make an offer and if accepted, hey presto!
I think Aussies love talking property, because for such an illiquid asset – it’s so simple to transact.
There are other investments you could consider of course.
Like cryptocurrency (Bitcoin) or peer-to-peer lending or even starting your own business.
These non-traditional forms of investing are a bit more hands-on and arguably riskier than the more traditional forms.
But hey, the world is your oyster out there – there are definitely more than one way to make a buck.
Remember, with all investing, there is risk!
But to be honest, if what is preventing you from starting out is the fear of losing money, then that is a very valid concern.
The only response I have to that, is my own approach when I consider risk.
Which is, whether I believe that in the long-run, prices will be higher.
And that is a resounding yes.
Because I think prices are an expectation of future growth.
So the question you have to ask yourself is, which areas of the world do you think will continue to grow?
And then go from there.
Now if what is preventing you from starting out is inaction or procrastination – then hey! You’ve read this post, what are you waiting for!
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