Making the decision to embark on a long-term investing program could be the best financial decision you'll ever make.
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How Do I Start Investing?
By Scott Pape.
Other than paying off personal debt, making the decision to embark on a long-term investing program is absolutely the best financial decision you’ll ever make. Yet for many this is where the confusion starts. Taking your first steps down financial easy street can feel a lot like Lygon Street on a Saturday night – too many spruikers trying to convince you they have the best product.
Managed funds are the best place to start your investing program if you’re starting with a few grand. Their great advantage is that they allow you to pool your money with others to get a better spread of investments than you could achieve on your own. Another benefit is that investing decisions are made by full-time experts.
Let’s take it down to street level. Just say the gang from Ramsay Street want to start investing but they don’t have any experience in buying and selling shares. The coffee shop is kicking butt so Harold has five grand to invest. Toadie has come up trumps after settling the insurance payment from killing off Dee, and Carl chips in because he needs to get his finances back on track after Susan took him to the cleaners in the divorce.
So the boys take their collective cash down to Lassiters and ask the only member of Ramsay Street with a clue about money, Lou, if he could invest the proceeds on their behalf. Sniffing an opportunity, Lou agrees to provide his investment expertise for his neighbours for a fee of 2 per cent of whatever’s invested each year …
You get the picture. Now we’ve worked out what a managed fund is, it’s time to decide what to invest in.
Managed funds, like soapie stars, come in all shapes and sizes. Most funds will invest in property, shares, or cash or fixed-interest products, or a combination of all three. Working out which fund best suits you depends on your investing time frame. If you’re going to need to draw on the money within five years, it’s probably wise to go with the safer option of a cash account, or a high yielding e-account (more about these later).
Shares have historically given the best returns over the long run, but they have also proved the most volatile. If you’re serious about creating long-term wealth, you should aim to invest in shares and have a time frame of decades not days.
Armed with this knowledge we’re now ready to start shopping for a managed fund. You can either consult a financial planner for a recommendation, or you can do it yourself with a discount broker over the internet (the two major players are E*TRADE and CommSec). The problem with many financial planners is that they often recommend only managed funds they are associated with. If you go to a financial planner employed by a bank, more often than not they’ll recommend funds owned by their bank. The other disadvantage with financial planners is that will usually charge a commission for ‘selling’ you the fund, in the form of an entry fee and a trailing commission each year. Over the life of your investment, as the fund grows, this can add up to thousands of dollars.
Screw the fund manager on fees
To stop the flow of fees, you can investigate different styles of managed funds – notably indexed funds and traditional listed investment companies (which trade on the stock exchange), as these tend to offer lower fees than their retail equivalents. .
Most discount brokers rebate entry fees, and they also have search engines that allow you to check out thousands of funds. Better still, you can refine your search by stipulating certain criteria: the type of fund, historical investment returns, option of regular savings plans and management fees. The key factor is the rate of long-term returns over at least the past decade. Fees are the next biggest concern: how do the best performing funds compare with each other?
After you’ve narrowed down your list to a handful of potential favorites, download their offer documents (known as product disclosure statements, or prospectuses in the case of listed investment companies), grab a beer and have a read. None of these documents will be as exciting as The Da Vinci Code, but they shouldn’t be confusing. If you find one that bamboozles you with buzz words, bin it and move to the next.
Despite what fund managers would like you to believe, investing for the long term is a fairly simple process. As a financial adviser I’ve found that the only time things get confusing is when someone is trying to sway you away from the time-tested rules of wealth by attempting to justify why they’re ripping you off with their exorbitant fees!
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The review "Barefoot.com.au – How To Start Investing" was last updated on 26/09/2009.