Why millennials are the lucky ones when it comes to investing in shares
The combination of a sharemarket boom, ultra-low interest rates and COVID-19 has created periods of working and staying at home, combined with that I have not witnessed for decades.
Take it from a late-stage boomer - millennials are the lucky ones when it comes to investing in shares.
You will benefit from digital and technological innovation that makes share investing more accessible, and the advent of multiple online platforms allows for easy and affordable investing, regardless of budget.
Add to that the excitement of living in a once-in-a-generation period of change: think about what we call the "mega secular" growth trends such as green energy, electric vehicles, decarbonisation, data, ecommerce, digitalisation, gaming and cybersecurity, to name just a few opportunities.
And you have far greater choice.
You can invest your money in a way that aligns with your ethical values, meaning your investment decisions may even effect change, if you follow an ESG (environmental, social and governance investing) approach.
You can also invest outside Australia, in the booming US stockmarkets or pretty much anywhere else in the world.
Take your pick
Traditionally, share investing was transacted through a private client stockbroker, who was not only an adviser but someone who you would meet for a friendly annual catch-up to discuss your blue-chip portfolio.
More often than not the amount of cash needed was higher than most of us could afford and the fees reflected the company research and advice we received.
Technology advances in the past decade mean you can now invest small amounts of savings as regularly or intermittently as you want via online platforms and apps that can be easily downloaded.
For most of us there are three ways to invest.
You can invest directly in shares both in Australia and overseas and you take responsibility for picking those shares.
Investing directly is for those of us who love sharemarkets and are happy to read, listen and research. Direct investing is not necessarily for the newer investor or those who have yet to build their confidence.
The second way to invest is through exchange traded funds (ETFs), which are financial products that are listed on the sharemarket and represent an underlying basket of shares.
The third way is through managed funds, which are also listed, but the costs tend to be higher than for ETFs and there is an expert who selects the basket of stocks you invest in.
All three options allow you to choose whether you buy shares according to various criteria, including:
• Sectors, such as technology, energy, health, financials, energy, property.
• Performance factors, usually growth or value and/or income.
• Indices, for example, the S&P/ASX200 in Australia), or the S&P 500 (US) or NASDAQ (US/global technology).
• Regions and themes, for example electric vehicles, cybersecurity, space, life sciences or genomics, China, emerging markets.
Apps make it easy
Micro-investing apps such as Raiz allows you to invest your change from daily purchases into a variety of ETFs for a $2.50 monthly fee. Stockspot starts at a minimum $2000 investment across 10 possible ETF portfolios that can be selected based on your risk appetite and growth potential.
The CommSec Pocket App starts with a purchase as small as $50 and a $2 fee, compared with the usual $500 minimum trade and a fee of $10 to $29.95 if you were to invest via the CommSec online platform. The app offers seven ETF investment options, including a good range of international funds.
Spaceship is a robo advice wealth manager that allows you to start by buying units in two managed funds (which hold a group of international and Australian shares). For amounts under $5000 the fees are zero and for over $5000 they are 0.05% to 0.10% depending on the amount invested.
As a rule of thumb, you don't want to invest less than $1000 in any one share (that is a personal choice), so if you are starting with smaller amounts it is best to invest in ETFs or managed funds (keeping an eye on the costs).
If you have $5000 or more and are looking at owning shares directly, there are low-cost platforms such as Stake (which allows you to invest in US stocks), eToro, CMC, Saxo Markets, IG, Bell Direct and then the more traditional platforms such as CommSec, nabtrade and Selfwealth to name a few.
It's easy to research the options online and it's always worth asking your friends.
Little and often
There is no hard-and-fast rule on how much and how often to invest, but most experts advocate you spread your buying over a period regardless of the amount.
The reason is that it allows you to dollar cost average, which is investing through the sharemarket cycles. It also works well with your budget: as the money comes in you can invest the savings.
Shares represent a small percentage of a company that you own. The share is not the value but a price that is created through the demand and supply for it at any one point in time.
Sometimes what looks like good value to me may seem like poor value to you, and that is what makes a market.
This is why share prices fall when they are out of favour and increase when they are "hot". If you buy the same share or basket of shares through an ETF during the highs and the lows, then on balance you will buy at an average price.
Why time matters
The more you save and invest when you are young, the longer it will stay in the markets and the more you will have in the future.
As the genius Albert Einstein reportedly said, "compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it."
Compound interest works for shares and it's why people always advocate "time in the market" not "timing the market". Assets like shares generate capital (price gains) as well as dividends (income).
The more you reinvest your capital gains and income, the more your gains can be used to create more gains. Compounding is the basic premise of why people invest over time.
Millennials are young, with years ahead of you for compounding to do its job and for you not to be spooked by the short-term roughs in sharemarket cycles.
Take charge of emotions
As with learning to swim: you can practise all you like on land, but you won't know if you can stay afloat until you actually get wet!
The same applies to share investing; you must bite the proverbial bullet and start the process. I always suggest to newer investors with smaller amounts of money that they can start with an ETF until their savings have reached a certain goal (such as $5000) and then they can invest directly in shares.
If that amount is too much to start, you can invest in a broader index ETF or a thematic ETF until the pool reaches a higher amount. You can either cash that in and invest across five shares, for example, or start adding shares to the portfolio.
And when you get started investing directly in shares, opportunity awaits. If you had been lucky enough to buy 100 Afterpay shares on March 23, 2020, at $8.90 (the low point of the corona stockmarket) then you could have made as much as $15,800 if you had sold at the top of $158 on February 10, 2021. How easy was that?
Well, that's the point. If picking the winning shares at their low point were that easy, we would all be multi-millionaires.
But you must be brave to buy in at lows in the market - even after a crash - and that requires strong control of your emotions. The human emotional response to volatility (up and down movements) means we must know ourselves - and our ability to tolerate fear and greed - as well as the companies whose shares we are buying.
If you understand how much risk you can take and you know the company well enough, then you can see through the sharemarket's volatility.
Your tolerance for risk as a younger investor is by default higher. Compounding and time in the market will smooth over some of your poorer or badly timed investments, and you have an earning capacity that allows you to continue to save to add to your investing.
Myth or winning strategy?
I recently read a great investing tweet: "10% of successful stock picking is picking a great stock - the other 90% is not selling them."
So, having just told you that you have plenty of time in the market, that's not to say that you never sell a stock.
If you've picked winning stocks such as an REA, Xero, Afterpay, CSL or Amazon, Apple and Microsoft, and held onto them and added more when you had more cash or dividends to invest, then you'd be on your way to being a minted millionaire.
The problem is that not all shares are long-term winners. Most shares have a period when they do well and then the company's business model comes under pressure, or the great CEO moves on.
Holding a share portfolio for the long term requires more than just a set-and-forget approach.
You need to monitor what is happening to your shares and remember even the best long-term performers and wealth creators do not go up in a straight line every day, week, month or year. You need to understand why you are holding the share, and whether you see it as a standout in 10 years.
Controversially, I would put a stock like Tesla in that category (not that I am recommending you race out and buy it), but I mention it to give you the flavour of a stock that is changing how we create and use energy and software for mobility and transportation.
As share investing can be challenging, some experts have strict rules on when to sell and they do this by setting stop-losses. A stop-loss rule is triggered when a share price falls by either 15%, 20% or 25%, for example. When the loss is reached the owner automatically sells the share without considering the reason why the price is falling.
A stop-loss confuses the share price with the reason you own the share. Never forget the price is not reflective of how the share (company) is doing operationally.
Of course, the two can overlap: for example, a price will go up when the company is growing fast, or the opposite can happen if it is struggling. But a falling price can happen for many reasons, none of which may be related to the company's earnings.
My decision to sell is often based on whether there are better opportunities elsewhere, if the reason I bought is no longer valid or if a company has downgraded earnings on a few occasions. Stop-losses mean you sell a winning stock for no good reason, except a falling market.
Some investors follow the averaging-down approach, buying more shares as the price falls. Just speak to a few experienced investors and you will discover that averaging down can just increase your losses.
Unless you fully understand why a price is falling, then averaging down can be fraught with risk. As a rule, I prefer to miss the first 5% upward move after a share price bottoms and then I feel more confident to add to the position. Catching a falling knife is risky.
Do it your way
Whether you start investing directly or indirectly, just start. It's not an either/or decision. If you can use one platform or app to save up to a certain amount and buy into shares through ETFs, for example, that's awesome.
Then you can move to picking stocks directly when your savings and your confidence have grown.
Investing is a journey and you cannot expect to be an expert overnight. Know your limitations and your strengths. Your journey will not be the same as your friend's and the longer the time in the market the more your wealth can grow.
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