Ask Paul: I want to invest $500 a month but I'm worried
Hi Paul, I hope this email finds you well.
I'm reaching out to you for some advice regarding investment strategies.
At 51 years old, I find myself fully immersed in my career and increasingly aware of the importance of planning for retirement.
While I've developed a keen interest in the stockmarket, I must confess that navigating its complexities as a beginner feels rather daunting. The sheer volume of information on trading and price analysis is overwhelming, leaving me unsure of where to even begin.
With a monthly budget of $500 dedicated to investing, I'm eager to embark on this journey towards securing my financial future. However, I'm in dire need of guidance on the most suitable approach to take.
I would greatly appreciate any insights or recommendations you could offer.
Whether it's advice on specific investment opportunities, resources for novice investors or general strategies for long-term financial growth, your expertise would be invaluable in helping me make informed decisions.
Your guidance would not only provide clarity in a complex landscape but also instil confidence as I navigate this new territory. - Derek
Thanks for asking, Derek - all is well with me, despite my next birthday being 70.
That is a bit alarming! Interestingly, at your age I had similar plans, not so much about retirement, but about financial independence and what steps were needed to achieve that.
Yours is a really interesting question.
It takes us much deeper than more mechanical questions such as asset allocation, gearing, what shares or property to buy and so on. Philosophically and practically, financial independence
is a really sound goal. Our own view of financial independence will be different from everyone else's, but we should all aim for it.
We humans are funny things, but one thing that does seem to work, whether it involves a trip or a new car, is a bit of planning, focus and a target. This strategy worked for us and we reached our version of financial independence some time ago.
The idea was that this meant we could retire, but as with so many financially independent people, work became more enjoyable when I did not have to do it. So, purely because I want to, I still work a couple of days a week, preferably not Monday or Friday - and now that I think about it, Thursday afternoon, which is lunch-with-mates day.
Anyway, let's get to the real heart of creating wealth. Apart from events such as winning the lottery or, more commonly, getting an inheritance, wealth creation is not initially about investment. It is very simply spending less than we earn, which creates surplus income.
Your $500 a month to invest is a classic example of this. Your plan is to save an additional amount in excess of your work super and possibly mortgage repayments. This action, saving $500
a month, will lead to a real boost in your long-term wealth.
Let's look at the heart of your question. The key words are that you have developed a "keen interest in the stockmarket". This is terrific, but here our money personalities take us down two separate paths, and that is okay.
After nearly four decades of money chat, writing about money, professional investing and so on, it is very clear to me that there is no technical need to take a deep interest in shares and markets.
My interest is in people like you and strategy.
Investment is just a mechanical process and these days you can have your super in a huge, low-cost fund and get fantastic returns.
Equally, with money outside super, you can use a ridiculously cheap, broad-based exchange traded fund and let computers buying a global or local index do the work for you. Sure, you can pay more and go with an active manager, but the evidence is quite clear: beating the market, after fees, is near impossible over many years.
But this is a bit like saying "why play golf, the course will beat you?" And it will. But I like playing golf. I hope to get better, but because I only play once in a while and find practice very dull, I play very badly. The point is, though, that I like it.
I like the walk, the beautiful golf courses and the like-minded people. It's fun!
This is the approach I would like personal investors to take. The mechanics of investing must become fun. You learn for the purpose of learning. You make mistakes, you make good decisions.
When all is said and done, I see no evidence in the long term of individuals in the huge global sharemarkets beating the index or professional investment managers. But I hope that, as with golf, they enjoy the process.
Others may disagree, which is fine, but one thing we can agree on is that a lot of us like the returns we get on our money but don't enjoy the detail. Broadly, I follow my money closely.
I worked hard enough to build my investment pot, but that for me is an hour or two weekly.
Like millions of us, I enjoy the returns from my investments, not the detail. If my super fund or ETF has a stake in a toll road in Italy or a few shares in Portugal as part of a vast global portfolio, good on them. I just like the 9%pa or so (average returns over a typical 10-year period) that their hard work delivers to me.
It would be easy for me to tell you to just salary sacrifice the maximum to super ($30,000 this financial year).
But millions of active investors have a deep interest in the mechanics of money and make their own share choices. I say good on this group.
I doubt that they will earn higher returns on a risk-adjusted basis than us passive investors. But the critical thing, as with golf, is they don't expect to beat the course, but they enjoy being an active investor.
Those who have a target for financial independence, save in a disciplined fashion and apply that money to a logical strategy will succeed. The markets will do the work for you, but you get to choose how you deal with markets and individual investment selection, as either an active or passive investor.
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