Investing isn’t just for financy pants
By Clayton Daniel of Fund Your Ideal Lifestyle
I
remember over a decade ago when I didn’t know anything about investing. It’s a
really good frame of reference to have, and one that I hope I never lose.
Because
investing can seem ten million times more complex than it really is. Why? Well,
money is an emotional topic, and the first time you do anything it seems hard.
So
with that in mind, I wanted to explain all the financy pants terms that get
thrown around, and give some explanation as to where all the pieces of the
puzzle fit in. I think the more you understand about where you are investing,
and what you are investing in, the more control you will feel, and ultimately
the more comfort.
So
here we go.
Starting
right at the top we have the ever-ethereal word ‘market’. This word gets
thrown around a fair bit. It basically means the same as it always has. A place
where people gather to buy and sell. But instead of buying and selling fish or
bread, they are buying and selling assets like property or equities.
So
when something is traded on the market, it really means it is traded in a place
where there are buyers and sellers. If an asset has a market price, it simply
means the price is at a point between where buyers want to buy and sellers want
to sell.
Now
let’s talk about the most common type of asset traded on the market – an equity.
An equity is called as such as when you own it, you own equity in a company.
You own a part of the company. Equities have the remarkable distinction of
being able to interchange their name at any given moment. Have you ever heard
the terms ‘shares’ or ‘stocks’. Yeah, same thing.
At
this stage, now you know that equities are traded on the equity market (or
shares/stocks are traded on the share/stock market). This is where you can buy
and sell blue chip shares like the big four banks, or speculative mining
shares. There are thousands of different stocks to trade on the stock market.
The only limits are your limits to research and what equities you are
comfortable in buying.
Okay,
so that’s great right? You can go out right now and start investing. Fantastic.
What are you going to buy? If you are an investment professional, you will have
an investment philosophy that works for you. If you are not an investment
professional, you probably don’t have an investment philosophy.
Therefore
you can either spend a lot of time researching to become an investment
professional, you can hire an investment professional for you, or you can buy
what’s called an Exchange-Traded Fund (ETF). An ETF is simply
a computer algorithm that invests your money into equities. The benefit is, for
every change to the portfolio you aren’t charged a fee. Instead, you pay an
ongoing percentage fee to cover the management of your portfolio. This reduces
the conflict of ‘churning’ investments which is the natural result of a
business model where revenue is made through the amount of buy/sells that are
made.
As
you can see above, the amount of global money invested in ETF’s has grown
significantly since the start of the Global Financial Crisis (GFC) in 2007. So
why has the ETF market grown by 400% in less than a decade? Well for a few
reasons.
Firstly,
investors were burned so bad during the GFC that they got sick of paying for
stockbrokers, financial advisers, and fund managers to invest their money. The
argument that people were better at picking equities than computers were
largely proven wrong.
This
in turn created the rise in Modern Portfolio Theory. Put basically, you get 80%
of your gains and losses simply by being in the market. There are easily
refutable points to this theory, but put simply, it provided a framework to
build a portfolio without human involvement.
Which
brings me to technology. The technology to build these trading algorithms have
improved like all other tech has improved over the decades. These days there
are many different types of ETF’s, though most the money is still in the easy
to understand simple ones.
As
always, price is very important. Some ETF’s are so unbelievably cheap that it’s
hard to see where the revenue is being made by the product issuer. Some ETF’s
are so cost effective that on a million-dollar portfolio you can pay as little
as $300 a year.
And
with all these benefits it drew in many investors, which in turn created more
awareness, and more education. To the point where now ETF’s are essentially the
most popular way to invest. And considering the points above, it’s not hard to
see why.
Now
you know how to invest in the market, by purchasing equities through an ETF.
Brilliant. You’re nearly there. So how do you do all this? How do you pick
which broker to use, and which ETF’s to invest in. Well again, you can either
learn to do it yourself, hire someone to do it for you, or use technology.
This
brings me to the last piece of financy pants education today. The technology to
make all this happen – Raiz. Raiz is simply an app which takes the small amount
of round ups on purchases you make in everyday life, and invests them for you
into ETFs.
Raiz
themselves don’t have anything to do with the ups and downs of the market. They
simply make easy what has typically been hard to do – open an account and start
investing. They take the manual work out of starting a brokerage account, and
choosing which ETF’s to invest into.
They
take all the complexities out of investing, and make it as easy as buying your
daily coffee. And that to me is brilliant. As a personal finance expert, the
ease in which they make investing is unbelievable. Raiz are the packaging to
make investing easy for the every day person.
So
to recap: You invest in the market, by purchasing shares, with an ETF, through
the Raiz app. For more information on Raiz fees, click here.
Look
at you – all financy pants…..
By
Clayton Daniel of Fund Your Ideal Lifestyle
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The information on this website is general advice only. This means it does not take into account any person’s particular investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this article to fully understand the benefits and risk associated with the product.
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