It’s not a bad time for novice investors to risk their arm in the sharemarket. For relatively small amounts, they can buy good Australian companies at possibly bargain-basement prices, courtesy of the credit crunch.
The sharemarket may not have bottomed, but, unless you fluke it, it’s almost impossible to pick the peaks and troughs of any cycle.
What we do know is the sub-prime crisis and accompanying credit crunch began infecting global financial markets more than a year ago. How long it lasts is anyone’s guess, although forecasts range between three and 18 months. For those willing to take risk, equity exposure potentially offers handsome rewards, particularly over the long-term. And you don’t have to risk big sums to pick up bargains.
Get in for as little as $500
For a minimum of $500, investors can gain exposure to international equities through exchange traded funds listed on the ASX as iShares. Barclays Global Investors has 14 listed iShares funds offering investors exposure to international market indices in the US, Europe, China, Japan, Taiwan, Hong Kong, South Korea and Singapore. There are also exchange traded funds tracking the S&P ASX 50, 200 and listed property trusts.
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Buying an iShares fund on the ASX exposes investors to a portfolio of shares tracking a particular index. Investors can buy or sell their units in a fund at market price anytime the ASX is trading. Of course, there is risk. The value of your investment will vary depending on the performance of the underlying shares in the portfolio and movements in exchange rates. iShares funds listed on the ASX are not hedged for currency risk. It’s advisable to invest more than $500 as iShares transactions are subject to minimum full-service brokerage of at least $80.
Sharemarket analyst Carey Smith, of Alto Capital, says iShares offers the benefits of diversification, much like a managed fund, for a small investment. He says iShares funds make it much easier to gain exposure to international equities as investors do not have to search for overseas brokers, whether over the phone or online, to trade.
Smith says: “iShares offers a basket of overseas equities in one hit that can be sold in real time. “iShares are liquid and transparent. iShares funds follow an overseas index so performance can be easily monitored. Improving or deteriorating overseas equity markets are reflected in the value and price of the fund.”
Investments for $1000 or more
Investors can gain exposure to managed funds for as little as $1000 before regular monthly contributions of about $100 plus. Some say buying units in a managed fund is an enforced savings strategy. Managed funds can suit small investors looking for diversification in equities and other asset classes.
Alternatively, buying direct shares on the market may restrict a small investor to one or two companies, and you would generally need more than $1000 when brokerage is taken into account. But a managed fund can expose investors to numerous stocks and asset classes for a small amount plus regular contributions. And the fund is managed by professionals with access to huge research facilities. They do the homework and investing for you. Professional fund managers don’t get it right all the time, as we have seen during the past 12 months, but neither do big retail or institutional investors.
Morningstar editorial manager Phillip Gray says it’s not uncommon for retail investors to start with $1000. But he advises to start with a bit more to potentially enhance capital growth and dividends, while making comfortable contributions. There is little point struggling to make ends meet because monthly contributions to the fund are too high. Investing is long term and requires discipline to reap the rewards.
Gray says diversification is a big advantage of managed funds. He advises: “Some investors think they’re diversified because they own the Commonwealth, National and Westpac Banks. But at the end of the day, they own the banks and that’s hardly diversification, when you consider numerous other stocks, sectors and asset classes here and overseas.”
Gray says the myriad of managed funds enables investors to choose a vehicle that matches their risk profile and the goals they want to achieve. For instance, a mature aged couple looking for regular dividends can choose a fund focusing on income stocks. And the fund is legally required to distribute all dividends to unit holders on a pro-rata basis over a 12-month period. Franked and partially franked dividends generated in managed funds appeal for their tax effectiveness.
More aggressive investors can choose a fund focusing on growth stocks, or a combination of Australian equities, property and overseas shares. Gray says a managed fund with overseas exposure offers more investment opportunities in stocks and sectors not available in Australia, which is less than 2 per cent of the global market. But he also warns novice investors to be wary of cleverly marketed sector-specialist funds. “Not a day seems to go by when we at Morningstar don’t hear about the launch of some new managed fund specialising in infrastructure, agribusiness, climate change, water, property storage…the list sometime seems endless,” Gray says. “So many prove counter-productive to a good investment experience.”
Gray says a low cost, good quality share fund with a solid track record will suit novice investors looking for equity exposure. He suggests investors should ask these key questions before investing in any fund: How has the fund performed and why? How risky has the fund been? What does the fund own and where? Who runs the fund and how do they do it? What does the fund cost?
He says financial advisers can help investors choose a suitable fund, and clients should not hesitate to ask about costs and charges concerning the advice and recommendations. Is the financial planner recommending a fund because of a trailing commission? Gray says financial advisers are legally bound to disclose why they are recommending a particular investment. Morningstar researches and constantly rates managed funds.
Morningstar’s highest rating funds at August 29 were Barclays Global Investors, Fidelity Investors, Fortis (previously ABN Amro), Perennial Value and Schroders.
Ideas for $3000 and over
Michael Heffernan, of Austock, encourages younger investors interested in the market to buy direct shares. He says everyone has to start somewhere, but warns young investors to remain level headed during boom times and wary during bear markets.
“The market should always be treated with respect,” he says. “Plenty of young, over-ambitious and carefree investors have done the lot investing in stocks or financial instruments they know little or nothing about.”
Heffernan preaches sticking to the fundamentals of examining company earnings, price/earnings ratios, returns on equity and outlook statements. He likes proven performers with reliable earnings streams, particularly in volatile times. Young people should invest an amount they will not miss and take a medium-to-long term view. He says $2000 is enough to get started, but between $3000 and $5000 is a better sum to potentially boost capital growth and dividends in dollar terms.
“Young investors can slowly build a diversified portfolio,” he says. “Buy a profitable retailer (David Jones or The Reject Shop) as Christmas is approaching. Next time, buy a top-performing miner.”
The old fashioned approach
Another way to generate savings is the old fashioned way – put the money in the bank. And that’s not as boring as it sounds considering the carnage on global equity markets in the past 12 months. Investors can get 8 per cent or more in term deposits and it’s generally considered one of the safest investment options. Regular and disciplined savings aided by compound interest will grow a small sum surprisingly fast. Skip one take-away coffee a day and you will have saved more than $20 a week. Do that for a year and there’s more than a grand.