My 7 Basic Questions on Investing
Most mums and dads are busy with daytime jobs. By the time they have a day off, they find themselves doing the laundry and cleaning the house. So for the folks that do not have the time, I have good news for you - here are some basic questions (and answers) that I asked before investing my money into the share market. But the bad news is - at the end of the day, you need to educate yourself to have the right mindset and discipline. My previous post recommends books that will definitely help you get started.
What is Investing?
I like the definition from Investopedia,"Investing is the act of allocating funds to an asset or committing capital to an endeavor (a business, project, real estate, etc.), with the expectation of generating an income or profit. In colloquial terms, investing can also mean putting in time or effort - not just money - into something with a long-term benefit, such as an education."
Why do I have to invest?
As stated in the above definition of investing, after a certain period of time, you'll have a nest egg that can produce income. Ideally, the income that your assets produce should support your everyday expenses.
When you look at the 4% rule, if you have $1 million worth of assets in an index fund portfolio, at a withdrawal rate of 4% (i.e. $40,000) per annum, your portfolio has a great potential to last forever.
How can I attain that amount of money?
The answer is by saving, investing and by the power of compounding. If you set aside a portion of your money and invest it, it will compound in many years.
Using a conservative interest rate of 8% (approx market return), an initial deposit of $2,000 and a monthly contribution of $500, after 20 years, Total Interest shall be $182,364.
However, if we take it further to 25 years, there is a considerable amount of increase in Total Interest which accumulates to $338,194.
Hence, it pays to start investing early, have a high savings rate and go for the long term.
What are my options for investing?
There are various investment vehicles out there (e.g. real estate, stocks, bonds, cash etc). For me, I choose index funds/ETF to be the core building blocks of my portfolio. My ETF portfolio contains a mix of stocks and bonds.
What are index funds?
Basic definition of index funds from Investopedia is "a type of mutual fund with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor's 500 Index (S&P 500)."
In Australia, the popular index is ASX200 - composed of the top 200 Australian companies. ASX200 is commonly used as a benchmark of the Australian market performance.
An ETF (exchange traded fund) is a popular form of index funds. ETFs mimics and tracks a certain market index.
How do I buy index funds?
The wholesale and retail funds are available to be purchased through Vanguard Australia. ETFs can be purchased from ASX (Australian Stock Exchange) via a stock broker.
So if you decide that you want to buy an index fund that tracks the Australian market, here are the choices from Vanguard which tracks ASX300;
wholesale funds - Vanguard Australian Shares Index Fund (VAN0002AU)
retail funds - Vanguard Index Australian Shares Fund (VAN0010AU)
There are different fund managers that provide index funds namely Blackrock iShares, BetaShares, ETF Securities etc. My portfolio consists of ETFs from Vanguard and Betashares. Vanguard Australia wholesale and retails funds are a good option as well since you can save on transaction fees but the management fees are usually higher than the ETF.
Who are the online brokers in Australia?
There are many to choose from - CMC, CommSec, IG Group, Interactive Brokers to name a few.
These brokers serve as the middle men between the investor and the stock exchange. If an investor wants to buy/sell a stock, the stock broker will perform the transaction at the stock exchange on behalf of the investor.
I'm using SelfWealth. Read this post to get more information on SelfWealth.
This is a high-level view of investing - from the definition of investing to buying stocks from a stock broker. However, there are a lot in between. There are different strategies in assets allocation, associated risks, tax minimisation, market volatility etc, that need to be considered before investing. I can't stress enough the need for being mentally prepared and one should have set long-term life strategy goals.