Since the pandemic began in 2020, thousands of Aussies have joined the world of investing.
Some became interested due to lockdowns forcing people to stay home and having limited spending options. There wasn’t much else to do, and the markets were moving around a lot.
Others because there were no sports to bet on, so hey, why not bet on a few stocks instead?
And finally, a third group started investing because they decided to gain more control over their future. To slowly build up a passive income stream and a source of wealth they could use to free themselves from the reliance on employment income, while opening up greater freedom and options as their budding portfolio expands.
Whichever group you identify with, you’re now in the right place. Educating yourself and learning more about long-term investing will pay big dividends over time (lame pun totally intended).
The thing new investors often struggle with is where to start. There are so many options that it can feel overwhelming. Funds, strategies, active, passive, ESG, MERs, LICs - argh! - it can all appear too hard.
How do we know which type of investments will suit us and our personal situation? To help you narrow your search and find what you’re looking for, here’s a few questions worth considering.
What’s my timeframe?
This one is sometimes overlooked. You might think you’re long-term investing so your timeframe is 10+ years. But if part of you thinks there’s a chance you’ll want to buy a home in the next 3-5 years, then that changes things. It also changes how you should allocate your money.
Many in the FIRE community adhere to the idea that no money should be invested in the market unless they expect to leave it there for at least five years. Yes, savings accounts are painfully boring, but they also guarantee your money is there (in its entirety!) when you need it. No surprise 30% haircuts!
What am I comfortable with?
In theory, we all want the highest returns possible. But in practice, most of us don’t have the stomach to watch our investments fall by 50%.
How are you feeling with the current fall? Were you invested during the 35% drop in 2020? If so, how did you handle it? Was it a walk in the park, or were you a nervous wreck?
Think about how comfortable you are with volatility before it’s too late. It can be an expensive lesson to learn if you end up selling out at the wrong time.
How much time do I want to allocate to investing?
This is one thing which has changed for me a lot over time. In the beginning, I was happy to spend many hours each week reading, studying, and thinking about different companies and their possible future.
It was fun and interesting. But after a while, I found myself wanting to spend time on other things instead. That’s when I decided to simplify my investments and stop picking stocks. I should also mention: this was helped by the fact that I’d done no better than if I’d invested in an index fund!
How simple/complex do I want my portfolio to be?
How many holdings in your portfolio are you comfortable with? Two? Five? 15? How much is too much, how little is too little? It’s an important question to ask.
Remember, the number of holdings in your portfolio do not determine how diversified you are. A single fund might contain thousands of companies from all over the world DHHF and VDHG are two examples which are popular with the Pearler community).
Compare that to someone with a few ETFs, a few LICs, and half-a-dozen stock picks. Depending on which funds are chosen, this investor might actually only have exposure to a few hundred companies at most.
Do you want investments that you can buy and hold forever? Or do you want to rotate between different investments in an attempt to beat the market?
The return on your money matters. But more important is the time you spent to earn that return. If extra time doesn’t result in extra returns, then it’s probably wasted time.
Which style do I like?
Investment styles are almost like flavours of ice cream. Are you a plain vanilla kind of person? Or do you want eight flavours and five toppings spread across two cones?
Do you prefer active management, in which humans follow specific strategies and hand-pick the companies that go into your funds? Or do you prefer a more automated, hands-off approach with no filtering at all, like a total market index fund?
It’s important to note that many funds that are branded as ‘passive ETFs’ (because it's popular) are really just active management in disguise. It may be an ETF, but the stocks inside have been filtered and chosen by humans targeting a style, theme, or group of stocks in particular. Now, there’s nothing wrong with that, but it’s important to see through the marketing and look at what you’re getting.
Does my spouse feel OK about this (if you have one)?
An often overlooked question. While it’s not uncommon for one person to handle the finances in a relationship, it’s also best if a couple is on the same page. The non-finance spouse should at least have a rough idea of what their investments are, how they work, and why.
It’s unfair if only one person understands what’s going on and the other is completely in the dark about it. If something happened to you, would your spouse be overwhelmed by your investment accounts? Or have they participated enough in the process to understand on their own?
What makes the most sense to me?
After reading about multiple approaches, and probably getting annoyed by how many options there are, you’re bound to settle on a strategy that feels like the best fit.
You can always change your mind later, so don’t stress over it too much. If you do switch it up later, make sure it’s because of these qualitative factors here, not based on short-term performance.
The truth is, every fund, strategy, and style of investing has good periods and bad. So if your investments aren’t doing well, this doesn’t mean you’ve done anything wrong.
So what’s the best option?
There really isn’t a single style of investing that fits everyone. Even when you follow people who have a similar approach, their portfolios will often look very different. The best portfolio is the one you feel comfortable with.
Yes, some people consider some investments to be ‘better’ than others. But if it’s not how you want to invest, you don’t like those options, or don’t feel comfortable with that approach, then it’s probably not going to work for you.
It’ll feel like a diet with food you don’t like. Sure, it may be healthy for you, but if you genuinely don’t like what you’re doing, it’s hard to sustain.
There’s no need to stress about getting it right from the start. Your investments will change over time as you learn more - about investing itself and yourself as an investor. It’s what everyone goes through, and it’s completely normal.
Final thoughts
There are more questions we could have posed here, but hopefully this gets you thinking. A lot of these questions are personal in nature, which is why there’s no perfect answers.
It takes some pondering, experience, and some trial and error to settle on the right investments for your preferences, personality, and situation.
In future articles, we’ll look at some of the principles and mental framework that can translate into long term success for you as an investor. In the meantime, happy investing!
