Not everyone is cut out to be an investor, and I am glad this is so. The world would be a pretty boring place. For me investing is exciting – it is the study of the world, built into a measurable game, that you can benefit from and do some good with your proceeds. However, it can be quite an introverted, un-social and un-interesting activity if you aren’t into it – If my girlfriend ever can’t sleep I just talk to her about investing.
Besides the unsocial inclinations of investors, if it wasn’t for the craftsmen, tradesmen, artists, innovators, engineers and managers of the world, we investors would have nothing to invest in. That said the way the world works (and the fact that humans are wired to be most productive when incentivised to be so) we live in a world that revolves around a capitalist market system. In short, you have a very real advantage in life if you understand how it works and make the most of it. Like most other things in this world depending on how you use the market system – it can be your best ally or your worst enemy.
Even if I wasn’t an Investor, I’d I invested
I believe even if I was completely uninterested in share market investing, if I ignored it and did not participate in it, I would be making a pretty big mistake. As I have written in the past, I see the world’s share markets purely as vehicles for the world’s wealth to be shared amongst all who choose to participate.
For example: As a heavy industry Electrician I have helped to build energy infrastructure, mines, manufacturing plants and even schools, banks and universities – I have been paid well for doing so, but once I have constructing these projects they stopped paying me – even though they go on to continuously operate and churn out productive services, assets or cash. The same example can be used for any occupation – teachers, engineers, doctors, scientists etc.
I believe in not only working for your money, but also in investing your savings into these systems that we all work hard to create. If we do and do it wisely these systems not only serve us functionally and socially, they can also serve us, our families and our communities financially.
It doesn’t have to be complicated
I personally feel that many organisations profit from making things seem more complicated than they actually are and the finance industry may possibly be the most guilty of this. I also believe that this is why more people do not invest into the systems they work so hard everyday to create – fear of the unknown, confusing information, horror stories from others, doomsday media stories, not knowing where to start and the fear of being ripped off – all of which I am sure make most people cautious, as they did me when I first started.
But, that’s they way it is, so knowing what I now know after investing for about 13 years if I no longer wanted to actively manage my own savings I would ignore all of their noisy games and just keep it simple.
How I would invest my cash if I wasn’t a share market investor
- First thing I would do is – ‘Pay Myself First”. This means before any bills or any other expenses I would always take 10% of all income I received and put it into a bank account that’s only job is to grow my wealth.
- But before building wealth you need to protect any downside. So next, I would work out how much my monthly expenses are and then add 30% to this total as a buffer.
- I would then work out how many months worth of expenses I would feel comfortable as a minimum to have as ‘savings for a rainy day’ in the bank – taking into account losing employment, downturns in financial systems and any unforeseen potential expenses. Personally, I’ve always worked on a minimum of three months, preferred six months and if taking on additional risk like long-term travel, starting a new business or taking out a mortgage I prefer 12 months. Plus the 30% buffer.
- I would now keep savings this 10% until the ‘X’ amount of months worths of savings was achieved. I would simply save it in the most suitable high interest savings account I could find – ING Direct Savings Maximiser is my current account of choice. Note: This isn’t a plug for ING – just the account I currently use.
- Next once I had saved my ‘rainy day savings’, if I had private debt, I would begin paying down my debt faster by adding this 10% on top of my minimum monthly repayments – starting with the debt with the highest interest rate first and the working down until I had paid them all off (except a mortgage – as mortgage interest rates are generally lower on average than a long-term index fund returns. Where as Credit Card and Personal Loan rates are normally higher.)
- Ensuring now I had my ‘rainy day savings’ to look after my family in case of job loss etc and I had paid down all personal debt, I would now begin to divert this 10% savings into investments.
- I would automatically put the 10% into a simple, listed, low cost exchange fund. (I pick mine below.)
- I would then continue doing this forever, or until the dividends from this investment was paying 30% more than I required as an income to live on, should I choose to – and of course always reinvesting 10% of this to ensure the snowball continues growing.
- The only time I would otherwise stop putting savings away into this investment fund is if I needed to top up the cash savings account for some reason – which I would do and then continue building up my low cost index fund investment account again.
Why would I only use a low cost index fund
Simple. Low cost. Performance.
Simple: An Index fund is simply a collection of investments of all companies listed in a group of stocks in a certain index. In short my investment would perform pretty much along the lines of the economy that the Index Fund was invested in. For example an Index Fund that tracks the ASX200 (200 biggest companies by market capitalisation listed on the Australian stock exchange). If you think Australia has solid long-term prospect as a nation, putting your money into a fund that distributes it across the top 200 hundred companies of Australia may not be too bad of a decision. If you aren’t too sure on any one country a low-cost Index Fund that tracks the biggest companies in the world might be another option. (I pick mine below.)
Low Cost: I’ve worked as a Financial Planner before to gain an insight into the industry and trust me there are a lot of fees – it often made me cringe the layers of fees that are extracted from someones investment portfolio – often regardless of the performance. Between the fund’s fees and the advisor’s fees – fees can be over 2.5% before you know it. The simpler you keep it, with less ‘managers’ between you and your investments the lower your fees. (Don’t get me wrong advisors etc have their place, but I wouldn’t be using them to manage my investments in this way.) If you click through the links below on the funds I would consider, you will notice the Vanguard Funds I’d go with have fees ranging from – 0.15% and 0.21%. This alone already gives you a 2.25% or greater head start on someone getting charged a combined total of 2.5% in fees.
Better Performance: I personally believe this option would be better performing after fees than a lot of the ‘professionally-managed’ and privately managed money out there. And I’m not the only one Warren Buffett actually has a $1 million bet that, “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”
As an experienced private investor I believe you actually have a huge advantage over institutional money – as they are often managing much larger sums and have quarterly expectations to live up to – both of which I believe hinder long-term performance. Even with this advantage many private investors simply won’t be able to beat the Index. To be honest the temperament of many people just doesn’t work with a platform that offers you a price many times a day for a certain asset that can often swing wildly and trigger emotional and un-rational responses – usually to the professional or private investors detriment. If your money is in an Index Fund you can avoid this to a certain degree, you simply commit to the process, ignore the fluctuations and watch your money compound with the economy over the long-term.
The simple, listed, low-cost investment funds I would consider
Warren Buffett, arguably the world’s greatest every investor recommends this US listed fund – Vanguard S&P 500 index fund
For Australian markets I would go with – Vanguard Australian Shares Index ETF (VAS)
For an International Index I would go with – Vanguard MSCI Index International Shares (Hedged) ETF (VGAD)
If I didn’t feel I could beat these results by a substantial amount and do some good with the proceeds this is how I would invest my cash. In a nut shell, I would:
- Have enough savings in an accessible savings account to weather a storm.
- No to low personal debt.
- 10% minimum of all income invested continuously into a low-cost index fund or two.
- Sit tight and watch it compound over the years.
Enjoy the ride!