I find myself ranting at people about personal finance a fair bit. I want to know my friend’s numbers and I am always happy to share my own. I love this open sharing, and it feels rebellious. It feels counter-cultural – almost subversive – against all the stuffy, private discomfort there is about our finances. But during this conversation there is a difficult point. It’s when I’m asked for specific detail. “Okay, great, how do I start investing?”. I’ve tried setting research homework, writing the steps down on paper, texting people the first two steps. So I thought it was time to write it down with some detail. The steps, in order, are: Open a brokerage account; read about ETFs; buy what you like; work out how often you can buy more on a regular schedule; and don’t sell. Easy, right?
NB: This is my non-professional opinion. Please do your own research, this is just some info on what I did, this is not financial advice, Im not a financial advisor and this plan might not suit you, dont @ me.
Step 1: Open an account.
Most online brokerage accounts don’t have setup or ongoing account fees (fuck fees) so opening an account is risk-free. It is literally like a fee-free bank account, open it and use it as little or as much as you like. Open 3, they don’t care. If it seems weird that this is the very first thing, trust me, it takes 20 minutes to put in your info, then usually 3 days for them to confirm everything. Once it’s open the account will be there when you are feeling ready to start buying, or it can lie dormant forever without affecting you if you decide shares aren’t for you.
This is not a comparison blog post about the hundreds of different brokerages around Australia, just make sure you choose one that isn’t ripping you off. Aim for low brokerage fees (don’t get charged more than $10-$20 per trade) and there should be zero account keeping fees. Here are the two I’ve used, but you will find a lot through a simple Google search:
- Commsec by Commonwealth Bank. The app interface is great, you can buy shares without waiting for money to transfer in and it feels super familiar for any little kid dollarmites that grew up in Australia. You don’t need to bank with them, they will open you a little bank account but you only use it to buy and sell.
- SelfWealth. Currently has the lowest brokerage offered in Australia but keep an eye out because I’m sure brokerage will continue to get cheaper with the increasing competition in the market. The user interface for SW is crap, though all is forgiven due to the $120/year they save us in brokerage compared to Commsec. (Click HERE to sign up through my referral link and I’ll start you off with 5 free trades to use in the first month). What we don’t like about Selfwealth is that they have this social-media style element where they pit you against other users and tell you how badly you are doing compared to them. Just ignore it, we think it promotes a riskier way of investing that doesn’t work with our safe-investing mentality.
- You could also look into Spaceship/Commsec Pocket if you want a gentle start with micro-investing – again – please look at fees, you should avoid paying ANY continuing account keeping fees like in the Raiz app (HERE is a great youtube video comparison). We don’t use microinvesting and didn’t really consider them at the start as it feels like it complicates the process of getting right into shares and ETFs, with the freedom of choice to invest anywhere we want.
Step 2: Research ETFs
There are heaps of places on the internet that can explain what an ETF is way better than I will, so I’ll let you read some beautiful finance nerd’s description. The next question about ETFs asked is which ones to buy. There are so many, but don’t get held up by analysis paralysis. ETFs do have fees, just aim for low annual costs because thats been shown to be one of the biggest factors in long-term returns. Fees are the only thing standing between you and your returns. Have a look at the three lowest fee Australian ones – A200, IOZ & VAS-, some US or larger international ones (VTS, VGS, SPY, IVV & IWLD) and check out how to invest in line with your ethics through Australian and International ETFs which return really well but do have slightly higher fees (FAIR & ETHI). After comparing them all with a lot of scrutiny, we just ended up going with a mix of A200 and VGS for those good Australian dividends, plus a bit of international exposure for better capital gains. I haven’t thought too hard about percentages of each, we just buy by feel. As new ones come out we check them out to see if they appeal to us.
Step 3: Buy
Once you have finished reading 100 articles on VAS vs A200 vs IOZ (HERE is my favourite blog post comparison by Aussie HIFIRE), you will have a feel for what you like. Don’t jump ahead to working out your whole life’s investing goals, what you need your portfolio to look like in 20 years or all the exact percentages you want to own of each ETF. Best thing to do is grab $500-$1000 of your cash and buy. It sounds crazy, but even one buy will clarify so many of your questions on the process. Call it a test run. Even if you don’t continue buying for another whole year while you keep working up your courage/working out your investing strategy/building your emergency fund – your test run money put into VAS last year would have returned 4.21% in dividend income. Your stupid ING account dropping its interest rate constantly over the last year is now only returning you 1.8%. So that $1k gave you $42 FREE MONEY instead of a measly $18. Now imagine next year when you reach $10k, paying you $420… and then what about when you have a million? It’s a pretty big jump, but that $42000/year is what you can retire early on. (Read Mr Money Mustache’s article HERE on the shockingly simple math behind early retirement if I just blew your mind. I’ve just introduced you to FI/FIRE).
Step 4: Work out your buying schedule
Regular, small investments into the stock market is called Dollar Cost Averaging (DCA). So you can put aside $100/week, or $500/fortnight, or 8% of every pay? Whatever it is, the ways to work it out are varied. You can vaguely remember what you usually have left in your account before payday rolls around, or you can do a deep-dive, finance nerd analysis using our process below, or you can find some calmer middle ground to get a ballpark figure.
Now commit to saving that amount aside to place onto the share market at regular intervals. The idea is to buy low and high and everything in between so over time the share price is smoothed out. It’s used as a way to let you ignore price movements or economic news and invest without stress and get on with real life. So let’s start by analysing your finances if that’s what you want to do – otherwise skip this bit and move down to the calculator in step 3.
- Start by calculating and saving your emergency fund (if you have a house or a baby or a crappy car or a sickly cat, err on the side of a larger emergency fund). Your emergency fund is super personal on what you are comfortable with so I’m not going to tell you your business. As a couple we have 6 months of living expenses and keep that fixed amount in our high interest savings account.
- Now find out how much it costs you to live. We are strongly anti-budgeting but we did spend a good chunk of time analysing what we do spend – like we went line-by-line through our transactions for 3 months to get an accurate picture. From this we worked out our fixed costs which we put into a joint account that gets used to pay rent, bills and groceries. It also has a little buffer for extra unknowns. In our individual accounts we keep a bit of money for discretionary spending for the fortnight (I keep $300 for my personal expenses give or take depending on what’s happening that week). Everything extra goes into our shares account ready to invest. The transferring all happens on payday and it is not thought about again. You may have more buckets than us if you are saving a deposit for a house or have a mortgage, a travel fund, a child… Whatever your expenses are, work out a regular small amount you can squirrel aside (and for god!sake! don’t put any of your house deposit into shares! Message me if you are thinking about it and I’ll talk you out of it).
- Now you have your investment amount and you are ready to start DCAing. Check out this link here for a great calculator to work out your investing schedule. It’s by an Australian guy and if you enter how much you can invest, your interest rate at your bank, and leave the average return at 7% for a low but realistic return (Australian stock market on average will get you 7-13%) you can work out the most cost-effective frequency to buy more shares. It might tell you to invest anywhere from weekly to 6 monthly, and you are absolutely free to ignore it totally as I do sometimes. Some people decide a fixed date like the 1st of each month and invest no matter what. I tend to be a little more loose about the whole thing, if the market is a little depressed I will buy more often to take advantage or just buy when it feels like I have too much cash going to waste in the shares account. What’s important is to not avoid a buy because the ill winds are whispering about a downturn. They are always doing that, literally anything can happen and today’s price can just as easily be the lowest on the graph in a year’s time. But because no one actually has any idea, just keep buying regularly. You can look up other systems that people use such as lump sum investing, or value investing.
Step 5: Reinvest your dividends, DON’T SELL, and get rich slowly
Once you have bought some stonks, it’s time to sit back and bask in their glory and comedically laugh like a rich asshole about how smart and businessy you are now. The idea behind ETF investing with dollar cost averaging is that over time you get rich slowly, boringly and most importantly: SAFELY.
So how much have you made? Some brokerage apps are beautiful and will easily show you your returns but others aren’t so great. There is a great Australian based tracking site called Sharesight. It has a super simple layout to see your returns split by rise and fall in the share price as well as what you have made in dividends, it makes it easy to work out your tax, and its free if you add less than 10 different stock holdings. I love free!
Now reinvest your dividends. Whether you do this through an automatic dividend reinvestment plan setup in Computershare or Link Market services, or you get the dividends paid into your bank account and you direct them straight back in with the next buy. By jamming your dividends back into your portfolio, you really get your compound interest pumping.
NB: One last important note to mention. Red numbers and green numbers are fake. The rise and fall in your stock price in ETFs is natural and part of the important cycle of gain and loss in the markets. If the crash and massively quick market recovery from COVID that has just happened has taught me anything, it is that when it all looks like it is falling apart, don’t run, don’t sell. In fact, this is the time to be buying. Every other commodity out there is bought quicker when its trading at a discount, you should think about this when you are on the verge of selling. I think this topic alone needs to be its own blog post but for further reading I highly recommend reading every word of the Stock Series written by J.L. Collins, one of the famous names in the personal finance community. Starting with his first post linked HERE on why any major market crash actually has no impact on you or your finances if you are a buy-and-hold, long term investor, and you can just stop looking and keep buying.