Ask Paul: I'm 19, is it the wrong time for me to buy more shares?
As a reader of your magazine I have a couple of questions. I am a 19-year-old who finished my HSC last year and am looking to start an apprenticeship in carpentry.
I am doing casual work (30 to 40 hours a week) earning anywhere between $350 and $800. I have $30,000 in cash across two banks (Newcastle Permanent and ING), more than $2000 in shares and just under $2000 in super.
I am highly interested in the stockmarket and am looking to put $15,000 into two exchange traded funds (ETFs) and place another $5000 into individual shares. I have been researching where I will place this money for several months and am just waiting for the right price.
However, I have become slightly sceptical about Australia's economy and was wondering whether I am taking too much risk.
Should I put some money into diversifying my portfolio and attempt to protect myself against a recession? Are there further financial investments that I should be looking into? - Lewis
Lewis, you are in great financial shape at such a young age. My youngest child is 25, so thinking back to when I was 19 is really going back into ancient history.
But, like you, I was moving on to further study after my HSC. As a young country kid, I had moved to Sydney and was living in a residential college at UNSW. As I recall, my sole asset was a pushbike and I think I had a few hundred dollars from working during the holidays at the Griffith Leagues Club.
The key issue for any young person is knowledge, education and experience. I think you are wise in starting your apprenticeship. Skills in most areas are in short supply and well rewarded. Even better, you will earn as you learn.
Now to your money. One of the few truths about money is compound returns and here the earlier you start the better.
Another important money truth is that the most reliable way to accumulate wealth is to spend less than you earn. This you obviously do, but compound interest only works for those who save and invest.
The next truth is risk and return.
At my age of 64, risk is a bigger issue. For me to lose large chunks of my capital on a permanent basis is a really bad idea.
So I avoid investments with potential losses of 100%. However, the main reason I have a bit of capital is that I took this type of risk in my 20s, 30s and 40s when I used my capital to start businesses. A few of these did indeed lose 100% of what I put in, but others thrived.
For me, risk is something I need to manage through diversification. I am towards the end of my career; you are at the start of yours.
The only reason you would not invest in shares or ETFs is if you needed access to your money in the short term. This could be for travel, a car or all sorts of personal reasons. As you know, markets in the short term are highly unpredictable.
As I write this column the coronavirus is spreading quite rapidly. Markets have had a pretty decent drop. I have no idea where this will end up, but as it always has, through flood, famine, world wars and plagues, the world will blunder along.
So I don't see any great hurry to start investing in this volatile climate, but I agree with your idea of building up a portfolio of ETFs and shares.
With some unpredictable times in front of us, another money truth may help you. If you were to divide your money into, say, three pools, you could invest on three separate dates over months or even a year. This is "dollar cost averaging". It is so clever yet so simple.
If you invest a third of your money and then the market falls further, you make your next investment at lower prices. At lower prices you buy more, at higher prices you buy less, so you automatically get a better average price. This is one reason why regular contributions to superannuation work so well.
At 19, you will see plenty of recessions and plenty of global disasters, but my advice is to invest steadily throughout your working life. Take a look at a long-term share graph going back over at least a century. In the short term you will see all sorts of terrible downturns, but look at the graph over decades or a century and it moves one way ... upwards.
The only thing that would change that is a dramatic and permanent population decrease. Since about 1800 our population has moved from around one billion to 7.8 billion today. That is an awful lot of people who all generate demand, for things like carpentry and Money magazine.