Opinion: How To Start Investing With Nothing

Canstar’s General Manager for Wealth, Josh Callaghan

So, you know the value of investing and want to jump on the compounding bandwagon but there’s a problem, you don’t have any existing savings to start with. This is a common conversation I have and it goes across all life stages. Let me step you through the options and how to start to build an investment portfolio from nothing.

To help be as inclusive as possible, I’ll use the example of someone who is able to commit to $100 per month for investing. The guidance below can apply for any size portfolio but as you get into the tens of thousands there may be better ways to allocate your funds across sectors and products to optimise return and minimise fees. Until then, let’s stick with this example.

Shares and managed funds

The reason it’s so hard to invest at low amounts is, frankly, because many fund managers and stockbrokers don’t want your business. Generally, the investment world makes their money from either ongoing fees on large sums invested or commission on large trades so they price those with smaller balances out of the market.

Many fund managers have a minimum investment of between $5,000 and $250,000 for retail investors, making them out of reach for smaller investors. Online stockbrokers typically charge anywhere between $10 and $20 for a $100 trade, which even at the low end means that for each $100 trade you’d actually only be getting $90 worth of stock. Besides that, the minimum parcel of shares you can buy in a company initially is $500, so trying to buy into the stock market with less than that wouldn’t work anyway.

Side note: In case you decide to buy a $500 parcel of shares on the ASX, be aware that if the value of those shares drop below $500 your shares are considered an ‘unmarketable parcel’ and the company you’ve invested in may be able to sell on market or buy those shares at the lower price, essentially cashing you out of your shares and solidifying the loss.

Don’t get me wrong, this isn’t a shot at fund managers and stock brokers, you’d probably do the same if you were running their businesses, it just means that we’ll need to look a little harder to find a way into investing.

How much do I need?

In short, $1000 will get you access to a professionally managed fund at a wholesale rate so let’s start there as an example. Like I said, fund managers have minimum investment amounts to discourage small balances. However, some have an option to reduce the minimum buy in on the proviso that the investor commits to contributing $100 or more per month into that fund.

The lowest fund buy-in with regular savings that I could find was Colonial First State at $1,000 but if you are willing to save a little more, there are a few that start at $1,500. While many funds are vague on the details, to be safe from being sold out from the fund you should plan to make your monthly contributions until you exceed the standard minimum buy-in (i.e $5,000).

Let’s park the choice of fund for a bit and just focus on how to get to $1000.

Obviously, it’s 10 months’ worth of saving at $100 per month. You can do this in an everyday bank account, but in the interest of being a return-hungry investor, I’m going to suggest you at least consider getting a little investment return on your savings while you build them up. Two main options for this are micro investing and using a bonus saver account.

Micro Investing vs Bonus Saving Account

Micro investing can be a great way of accumulating ‘forgotten’ savings with apps like Acorns and FirstStep who will round up your spending and invest it for you. Micro-investing is a great idea and for some people who couldn’t save in any other way it may, over the long term, build a little investment nest egg that would have otherwise been spent.

A bonus saving account is an account offered by a bank or credit union that encourages saving by paying a bonus interest rate if you contribute a certain amount a month (usually around $40) and don’t make any withdrawals.

The important difference is that micro investing is invested in shares and bonds while the bonus saving account is held in cash at the bank, like any other bank account. The purpose of this part of the endeavour is just to get to $1000 in 10 months. So, with no downside risk and almost guaranteed returns, the bonus saving account seems to be the logical option. You can compare bonus saver accounts on Canstar.

Got to $1000, now what?

As I mentioned above, you can get into a Colonial First State fund with a starting balance of $1000 provided you sign up for a regular savings plan of $100 per month or more. There are other funds that offer lower than average initial deposits (around $1,500) if you commit to a regular savings plan but by signing up with Colonial you’re actually signing up to their master trust which means:

  • You’re getting access to a suite of funds, not just one which means that you may have a little more flexibility to change investments down the track.
  • You’re accessing wholesale pricing, meaning lower fees!
  • They consistently have funds that are ranked 5 stars in Canstar’s managed fund research, which considers past performance, fees and features.

Side note: Colonial First State have not paid for this mention or this article or been involved in the writing of it.

How do I choose a fund?

Whether you’re using the Colonial platform or going out to the wider market, the need to choose a fund is the same. Past performance is not an indication of future performance but it can often be a good starting place for assessing relative performance. When comparing the past five years of performance, the fact is that each of those funds have produced that return in the exact same market conditions. So, you may find past performance useful as a quality indicator to narrow down the selection.

Fees work like a golf handicap. If fund A is 1% more expensive than fund B then A needs to outperform B by 1%, just to produce the same outcome! You don’t necessarily need to go to the cheapest option, however just be conscious of the fees you’re paying. Given we’re talking about your first and (at this stage) only market investment, it’s probably worth considering a multi-sector fund that reflects your risk profile. “Multi-sector” simply refers to a managed fund that invests across a number of asset classes such as equities (domestic and international), commercial property, bonds and so on. These funds tend to come with reference to an investor’s risk profile from cash/conservative through to aggressive growth. Generally, low risk equates to low returns and vice versa therefore, you should consider where along that spectrum this investment sits.

For more detailed information on these concepts and more, check out this article.

Finally, avoid analysis paralysis. It’s important to take the time to make a good decision but don’t get to the point where you make no decision because you’ve over-complicated it. Have a look at Canstar’s managed fund ratings, narrow your selection down and then go for it.

And there you have it, you’re now an investor.

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Josh Callaghan

About Josh Callaghan
Canstar’s General Manager for Wealth, Josh Callaghan, has accumulated more than 15 years’ experience in banking and finance, with in-depth product knowledge across retail banking, stockbroking, life insurance, health insurance and superannuation. Josh’s experience combined with his passion for new technology and active role in the fintech community has positioned him as a credible thought-leader on the future of finance. Through his work at Canstar, Josh is striving towards a goal of creating a world where building and managing wealth is easy for all consumers.

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