“I know the kind of wealth I need to fund my future lifestyle, but where do I look for help and how do I get started?”
Such a common question, but a very difficult one to answer.
Unfortunately the world of finance has become so complicated and complexed that the layman often become confused when presented with the mountain of choices available to them. Confusion usually turns to overwhelming which then results in becoming too hard to bother.
I’ve been there before, just like many others.
When I was stuck in my early years, I wish someone had told me exactly what I needed to get myself into a wealth building position. There wasn’t any help available unfortunately and it took me years to find my way.
Fortunately though, my bad experience means I get to share the lessons so you can get a jump start on your own investment journey. Today’s post is about the thought process involved before making an investment decision and why I think managed equity (stock) funds may be a good investment when just starting out in building long term wealth.
So why managed funds?
The very limited amount of starting capital is usually the biggest problem for someone starting out in investing.
Putting money into a managed fund allows for investment exposure into asset classes that otherwise would be unavailable given the limited capital. For example, a startup capital of $2,000 might practically only get you into 2 sectors via stock ownership. Investing in a managed fund that have investments in 20 sectors instantly gives you 10x the sector exposure for the same amount of money.
Managed funds also provide asset diversification benefits that you cannot normally get via a concentrated stock ownership strategy. Here’s a post I wrote earlier on why diversification is so important to investing.
The final benefit, and arguably the biggest benefit, is the investment expertise on offer. Dedicated fund managers (like myself) actively manage the money on behalf of investors of the fund, ensuring that the money is invested in earnings accretive assets that will deliver value over the long term.
Before jumping head-first into a fund . . .
You and I are different, right? And you are different from the next person. The point is that everyone’s different in a lot of ways which make this step really important before diving into a chosen managed fund.
This first step is what the professionals call risk profiling and it involves going through personal questions to determine an appropriate level of risk for the given circumstances. Using my own situation as an example :
- Age and family situation : 32 years old with a young family.
- Employment status and job security : Full time fund manager with a medium to high level of job security.
- Years to retirement : At least 30 years, most probably longer.
- Preferred asset class : Diversified portfolio of growth assets including property, shares and cash.
- Style of investment : Hands-off passive style.
- Risk appetite : Medium to high risk.
To expand on the above; I am in the beginning of my career and plan to be working as long as my health allows. Using a base retirement age of ~60, I estimate that I’d have at least another 30 years of working life left in me. And very likely in funds management so my job security status should be relatively stable.
My preference is to have a diversified portfolio of high growth assets in multiple asset classes as I aim to not have all my investment eggs in one basket. As I haven’t necessarily got the time to actively monitor my investments, I prefer a passive approach, ie to have someone else do the investing on my behalf.
Given that I’ve got a long working life ahead which gives me time to start over again if any of my investments become lost-making, my risk appetite is medium to high which should (all else being equal) translate to better returns over time.
How someone’s individual circumstances can change the risk profile
Someone much older who is nearing retirement perhaps might have a low risk appetite given their ability to earn income has started to diminish. On the flipside, someone of the same age might have a very high risk appetite because they have a gambling nature and love to take risks.
Again back to my earlier point, everyone is different. It’s important that a thorough assessment of their own circumstances or seek professional advice to work out the appropriate amount of risk to take on.
What’s the strategy and timeframe?
During this fact finding stage, it’s also really important to work out (with a finance advisor) the preferred asset class to invest in. There are many asset classes and strategies out there which can all make plenty of money; the caveat being that only a few would work for any particular individual.
Index funds, real-estate, local and international equities, foreign exchange trading, fixed income, direct stock picking are all available investment options for example; the investor has to pick one carefully that suits their particular risk profile.
Investment time frame, ie the time one can afford to have their money tied up in the chosen investment, is also an important aspect to consider as it is different across asset types. For example fixed income like term deposits has a time frame as short as 1 year while property funds recommend up to 10 years.
It is usually during this stage where the appropriateness of a managed fund is determined.
Choosing the appropriate type of managed fund
Once the decision has been made that an investment into managed funds is an appropriate asset class, the fun stuff then begins.
There are thousands of managed funds (I kid you not!) on the market that allow you to invest in practically any strategy that tickles your fancy. Fortunately for you, technology has come a long way since I started my investment journey. Nowadays finance platforms like Netwealth‘s wrap offering allow you to quickly compare hundreds of managed funds after just a few clicks.
To illustrate what Netwealth can do to make the selection process easier, the following scenario will be based on my risk profiling information above. As always, I direct you to my disclaimer and point out that the following is not financial advice for you, your family or your pets! You should always seek your own financial advice from your own finance professional.
Netwealth’s finance technology platform
Netwealth’s product search page instantly provides access to over 250 managed funds that operate on the platform. Using filter parameters “Managed Funds” & “Multisector Growth”, the platform return 7 managed funds that may be suitable for my predetermined wealth objectives :
At a glance, the searched results give me a quick summary of the funds that might apply to my objectives; the name of the provider, the asset class that the fund focuses on, the total dollar size of the fund, and the annual management fees that is charged on every dollar invested.
Diving deeper into the product disclosure statement, or PDS, I can learn more about each fund’s investment objective and strategy, and the expected time frame that’s needed to achieve that objective. Most importantly, the PDS also tells you what the minimum amount of initial investment amount.
Once the perfect managed fund that ticks all criteria is found, all that is left is to fill up the application form usually found within the PDS. Like anything, application procedures differ between funds so it’s best to seek instructions on how to proceed directly from the fund.
Other things to note . . .
One thing that might not be obvious is that money invested into a managed fund is usually pooled together with other investor’s investments, and together it’s used to buy assets that will achieve the fund’s objective. In return, investors obtain a share of the managed fund in the form of units, each valued at a regularly determined unit price.
Managed funds aren’t the only investment options available to users on the Netwealth platform. It also extends to self-managed superfunds and direct share trading, both functions that would be appreciated by more advanced investors who prefers some level of discretion.
Most funds allow regular contributions to buy more units. To make full use of this flexibility, regularly buying more units in the managed fund is a fantastic alternative to putting money into a bank savings account because of the potential of higher returns on offer.
And that’s it!
I hope these basics facts on managed funds have kick started your interest in wanting to explore further. There are plenty of financial advisers via Netwealth who can help tailor a specific investment plan that’s suitable for your individual circumstance.
To get you started on the process, Netwealth offers a free membership account that has an extensive set of research tools on a range of managed funds and also a daily economic roundup. Really the simplest way to get the interest in managed funds flowing.
Educate. Plan. Partner with the right professional. Start Early. These will get you on the right path to building long term wealth.