Have you wondered how to start investing in Australia? Yes, there are heaps of options, but don’t let that put you off. Once you actually start, you’ll see how easy, and even boring it is. So what have I invested in, and how has it changed over time? Read on as I explain further..
Ok so you’ve boosted your income, created a budget and reined in your spending. You’ve created an emergency fund and now have respectable savings to which you’re making a regular contribution. You’ve done your homework, listened to Warren Buffet, maybe even read The Barefoot Investor or Dave Ramsay’s Total Money Makeover and you know investing is the only way to create long term passive wealth and reach FI.
But you still aren’t quite sure how to do it, or if you should be investing. If you’re still sitting on the fence – just do it! Invest $500 or $1,000 and see how it goes. Treat the money like it’s gone. I guarantee you’ll be just as pleasantly surprised as I was when I did it.
Hopefully by now, you’re probably chomping at the bit to invest in low cost ETFs (Exchange traded funds) and LICs (Listed investment companies) and receive a steady stream of passive dividends from your investment portfolio. You have probably read something about needing a brokerage account to invest. Yes, this is necessary to invest, and I will explain further..
What actually are stocks?
A stock or share is part ownership in a company. Suppose you start your own company. You own 100% of it. You start a company with a business partner. You own 50% of it. You buy a bunch of shares in Commonwealth Bank. You own something like 0.0001% of it, and although you probably won’t get much say about how the company is managed you are entitled to a cut of the profit!
Cool, so do you buy shares directly from the company and then sell them back?
Not quite. Companies generally go public because they want to raise capital (i.e. “if we sell half the company for $100,000,000, we’ll have all that money to grow the business and we’ll all get rich”). When companies do this they conduct an Initial Public Offering (IPO), which is a separate topic. Shares on the stock market are brought and sold by individuals (or larger investment companies, more on that later), much like if if you own some fruit you can take it to the market and sell it to me for a price you decide to sell it for and I am willing to pay.
When you see the share price, that is simply the most recent price that a share or group of shares was sold at. If a lot of people are trying to buy shares, that price moves upwards, and if a lot of people are selling the price moves downwards (think supply and demand). When people talk about how ‘the market’ going up or down and point to a graph, they are generally referring to the movement of share prices in an index (i.e. a collection of companies) such as the All Ordinaries (the top 500 listed companies in Australia), Dow Jones (30 large companies listed in the USA) or the S&P 500 (500 large companies listed in the USA).
Hang on. So the share price has nothing to do with the actual company and everything to do with what investors are willing to pay for it?
Pretty much. This is what it means when people talk about picking up a bargain, or a particular stock being overpriced. In the 2008 Global Financial Crisis when the market essentially halved in price, it wasn’t as though the biggest companies in the world literally halved in value. People just rushed for the door and tried to offload their shares, which drove the price down.
Speaking of that, what there is another crash? Can’t I lose all my money?
In theory, yes. If you invest in an individual company, and that company goes under, you would lose your money. But suppose you invested in all the top 200 companies in Australia (more on that later). For your investment to go to zero, Commbank, Westpac, NAB, ANZ, Woolworths, Coles, Telstra, BHP and all the other major companies you have heard of would have to go under (in which case your investment would be the least of your worries). Realistically it is never going to happen.
Statistically, 3 out of every 4 years the market goes up in price, and 1 in every 4 years it goes down. Once every decade or so there is generally a big crash, with smaller ones every few years. This is just a normal part of the market cycle. The market has always trended upwards in the long term (at least in developed countries such as Australia) and is almost certainly going to continue doing so. However, in the short term, things can be unpredictable. It would be unwise, for example, to invest money you are planning in using for a house deposit within the next few years.
What companies can I invest in?
Pretty much any listed on the Australian Stock Exchange (ASX). There are ways of investing in individual companies listed in other countries. But we’ll discuss that another time.
In the past few decades, Exchange Traded Funds (ETFs) have become very popular. These are essentially just a bucket containing shares in multiple companies. These are a great way to diversify (i.e. not put all your eggs in one basket) as well as getting international exposure. Some popular ETFs are Vanguard Australian Shares (VAS) which contains the top 300 companies in Australia and Vanguard International Shares (VGS) which contains thousands of the biggest companies around the world, excluding Australia. There are ETFs for almost everything from Ethical Investments to India to water companies to eSports companies to corn to pharmaceuticals and everything in between.
You can also invest in a Listed Investment Company (LIC), which is a company that hires active fund managers to pick stocks and build a portfolio that they believe will perform better than the market average (some of these include AFIC and ARGO, which from memory are mentioned in The Barefoot Investor).
There is an ongoing debate on whether ETFs or LICs are the better investment. I think either is fine as picking individual stocks yourself is a tricky game, however, ETFs generally have lower fees and have on average performed just as well as managed funds, if not better.
Isn’t now a terrible time to buy though? I’ve heard the market is at an all-time high! And isn’t there a recession coming?
Historically the market has always trended upwards – there have regularly been all-time highs!
There will likely be a recession in the next few years, but nobody knows. It may be tomorrow. It may be next year. It may be in 5 years. By the time it happens, the market may never go lower than where it is currently at. I don’t know, you don’t know, the financial media has been talking about it for years and will act like Nostradamus when it finally happens, but they don’t know either.
If you are investing in ETFs for the long term, TIME IN THE MARKET is more important than TIMING THE MARKET. A very popular strategy is Dollar Cost Averaging (DCA), by which you invest a little bit at regular intervals (for example $5000 every 3 months). This means you invest during lows as well as the highs, and your entry price gets averaged out.
For a far better explanation, check out this infographic: https://www.personalfinanceclub.com/how-to-perfectly-time-the-market/
What are dividends?
As you are the part-owner of a company, you are entitled to a cut of the profits. Companies generally try to reinvest profits into things like marketing, research and development, expansion and generally trying to grow the company. However sometimes if the company is very big already it may have some profits leftover and decide that they are better off paid out to the owners instead. That is a dividend.
There is a fair bit of nuance to this, but here is the gist. The company you part own makes a bunch of profit, which that company, and by extension, you as an owner, pays tax on (you won’t literally see it in your tax bill, but just hold that thought for a second). As a part-owner, you are paid some of the profits as a dividend, which you also have to pay tax on… what kind of shenanigans is this? Having to pay tax twice?!? Suppose a company pays 30% tax on its earnings. You receive a $100 gross dividend as a $70 dividend with a $30 franking credit. Come tax time you would need to pay tax on the $100 gross dividend. If you are in the lowest tax bracket and your marginal tax rate was 0%, you would be refunded the entire $30 that the company already paid (this is why franking credits are so popular with retirees). If your tax rate was 45%, you would only have to pay $15 for the $100 dividend (as the company has already paid the $30). leaving you with $55 total.
What are bonds?
Bonds are basically a loan to a company or government. You lend X amount of money for Y amount of years and get paid a yearly interest payment (known as the coupon) of Z. You get your money back at the end of the time period when the bond reaches maturity, or when you sell the loan to somebody else.
Bonds are generally considered defensive investments, as they tend to maintain their value during economic downturns and are good for retirees or people who already have a large base of wealth and want to maintain it while living off the coupon rather than taking on the high risk (in the short term) high reward (in the long term) of the stock market.
It is possible to be investing in the stock market without actually owning shares, and this is through the vehicle of mutual funds. Mutual funds1 are products sold by investment firms and banks, where their institution essentially manages your money for you, for a hefty fee. You also risk losing everything if they go bust.
I don’t like mutual funds, as they often have high fees which eat away at your returns. They are also mostly actively managed, which means commissions, brokerage fees and dud picks all erode your fund’s performance.
A macro study by StockSpot found that worldwide, over 40% of investors’ returns were gobbled up by fees and brokerage every year! For a whole other host of reasons I discuss in my other posts, I recommend going with buying index fund stock ETFs and LICs through a discount online broker with the shares being in your name (or owned by the lower income earning spouse or trust structure for tax efficiency).
You can buy shares through online brokers such as Commsec, Commsec Pocket, NABTrade or SelfWealth, or via Microinvesting apps
What is a broker?
To begin investing in shares, like a good quality, low fee stock index ETF (Exchange Traded Fund) or LIC (Listed Investment Company) to help you reach financial independence, you will need a shares brokerage account from a stock broker. These brokers are the ‘middle-men’ between you and the stock market. They place orders on your behalf, take your money, and then give you your shares, of course charging you a fee for their service along the way. Your shares are then registered in the share registries in your name, and Voila! you are an investor and now reap the benefits of dividends and capital growth.
The development of the internet and technology means investors have unparalleled access which has never before been seen. Having a smartphone means you have access to everything you need in the palm of your hand to invest and start your journey towards Financial Independence.
This means that you don’t need to go and see a financial planner, adviser, a bank or some other financial professional to get started investing. If you’re terrible with money, maybe go and do that – but realise it’s going to cost you possibly both fees and commissions, and you might not be getting independent advice that is in your best interest – See: Royal commission into banking and finance sector2.
The beautiful thing about online brokers is that they are cheap, and do exactly what you say. Discount online brokers can provide rock bottom flat fee trading prices, rather than the old percentage commissions and high fees that the brokers of yonder-day would have charged. And they aren’t pushy, unloading silly or downright dangerous financial products onto you in the pursuit of juicy commissions.
Discount online brokers
There are a number of discount online brokers you can go with, and I think that the most important three factors when choosing a broker is;
- They need to be CHESS sponsored: This means you own the shares and they are not holding them on your behalf. If not, like with many of the micro-investing companies (like Spaceship, Stake and Raiz) you could be at risk of losing everything if the company goes bust.
- They need to have ROCK BOTTOM brokerage prices per trade, and should be fixed-price trades, not percentage based.
- They should have a good website, mobile app and good customer service.
“Put simply, CHESS-sponsored investing is when you buy, sell and hold your shares directly with the Australian sharemarket, also known as the Australian Securities Exchange (ASX). When you buy shares through a CHESS-sponsored broker, the ASX puts your name, address and other personal details in the “Owner” column.For completeness, CHESS stands for Clearing House Electronic Subregister System. It’s the (unintuitive) acronym used to describe the underlying computer system used by the ASX to record shareholdings and manage the settlement of share transactions.”
Stock broker Trading platforms in Australia
Here is a list of trading platforms I have reviewed
- CommSec Share trading
- Stake US Share Trading
- CMC Markets
- IG MarketsGroup
Micro investing apps
Microinvesting is a great place to start as you can buy smaller amounts with relatively low brokerage (i.e. the fee to purchase shares). This is a good way to put a little bit of money into the market, dip your toes in the water and see how it all works.
The downside of microinvesting apps is that you can be limited in what you can purchase, and typically the fees can be a higher percentage of your trade. In the long term, you may wish to use another broker which is more economical for investing larger amounts and offers a greater number of investment options.
My choice: Pearler – you can read my review of Pearler HERE.
I choose Pearler for a number of reasons, with my top 5 reasons being:
- They have automated investing – you can put your investing on autopilot and forget about it
- Pearler have ultra low brokerage fees – $6.50 flat rate (or $5.50 when pre-purchased)
- The team behind Pearler have a great work ethic and excellent customer service
- Pearler encourage investors to invest for the long term, rather than to trade which is a much riskier way of investing.
- They have portfolio templates which you can use to guide your investing, and you can also see how others in the Pearler community are investing.
Stock market research tools
As an investor, you know the importance of reliable data and research when it comes to making investment decisions. This is where Stockopedia comes in, offering an all-in-one investing research solution for stock market investors.
I should point out from the beginning though – Stockopedia is NOT a stock-picking service, and they will not tell you what to blindly invest in. What they do provide, however, is a comprehensive database and analysis tools that investors can use to research companies and evaluate their potential.
Stockopedia is an online data and research platform that provides integral data related to shares, making stock market investing analysis more straightforward and efficient. In this review, we will explore the features and benefits of Stockopedia, highlighting why it is a great online service for all investors, and a must-have for those wanting to invest in individual stocks. Check out my comprehensive Stockopedia review here.
Investing in an ETF or LIC
There are a staggering amount of investment products out there. Thankfully, all you need to care about is a couple of ETFs or LICs. You want to stay away from share picking, as studies show that buying and holding a low cost ETF or LIC is your best chance of success. Most active stock pickers under perform the market, and even Warren Buffet, the world’s best investor says buying and holding a low cost index fund practically makes the most sense, most of the time.
I personally invest in just 3 ETFs (A200, VEU and VTS) but in the past, I owned all of the following ETFs and LICs as they give global diversification and exposure to some of the world’s largest companies for a ridiculously low price.
Let me introduce some of them..
Vanguard is one of the world’s most well known and trusted investment companies founded by American John Bogle. Vanguard is the world’s largest provider of mutual funds, and the world’s second largest provider of ETFs. Vanguard offers a number of ETFs, but the ETFs I particularly like due to their ultra low fees (Management Expense Ratio’s or MER)4 and awesome performance at consistently providing me market index returns;
- VAS – Australian market index (ASX code: VAS). Low MER of .10% ($10 per $10,000 invested per year) and owning all those Aussie companies provides recurring juicy dividends and the unique tax advantage of franking credits which is why I used to own VAS. VAS manages $17B of Australian companies including the big four banks (Commonwealth, Westpac, ANZ and NAB), mining and construction giants BHP group, CSL, as well as telecom Telstra, and consumer staples Woolworths and Wesfarmers.
- VEU – FTSE All world index minus the USA market (ASX code: VEU) . Diversification at the low price of a .08% MER ($8 per $10,000 invested per year). Owning VEU provides diversification into a $73B fund which owns some of the world’s largest companies such as Christian Dior, Nestle, Volkswagen, Toyota, BP, Shell, Samsung. I don’t know about you but my family, friends and I use products from all of those companies every day, which is why I own VEU.
- VTS – USA total market index (ASX code: VTS). Ultra low MER of .03% ($3 per $10,000 invested per year). The US makes up some 40% of the total world market and this ETF allows you to own a slice of $2.98B of well known brands like Alphabet (Google), Amazon, Apple, Facebook, Berkshire Hathaway, Visa, Exxon Mobil and Microsoft for an ultra low cost ($3 is less than half of the brokerage cost of even buying the ETF!), which is why I own VTS.
Betashares is an Australian Investment company that manages over $8B over a range of ETFs.
- Betashares A200 ETF (ASX code: A200) is their equivalent product to Vanguard’s VAS (although it tracks a slightly different index, the top 200 Australian companies as opposed to the top 300). A200 has an amazingly low Management Expense Ratio of .04%, which means it only costs you $4 per $10,000 you have invested per year. A200 is a relatively new product, and has $2.7B under management with solid performance. It also dropped it’s MER in Feb 2023 from .07%, down to .04% which is a huge drop and makes it a very attractive choice for any investor. It’s also one I continue to own.
Blackrock is an American global investment management corporation based out of New York and is one of the world’s largest investment asset managers, with over (USD) $6.84 Trillion in assets under management as of 2019. They operate globally in over 100 countries, and their largest division is iShares – a group of over 800 exchange traded funds, which is the largest ETF provider in the world, piffing Vanguard for the top spot.
IVV is the iShares by BlackRock total US market, which seeks to track the investment results of large-cap US stocks against the S&P US 500 index. This particular fund is domiciled in Australia (ASX:IVV), and has over (AUS) $5 Billion under management in it. Because it’s domiciled in Australia, Australians won’t have to submit any foreign tax forms to the US.
The top ten holdings are Microsoft, Apple, Amazon, Facebook, Berkshire Hathaway, Alphabet (google), JPMorgan Chase, Johnson and Johnson and Visa (which account for 21.57% of the total portfolio) showing its extreme diversification. The Management fee is a ‘black’ Rock bottom at .04%.
The Australian Foundation Investment Company (ASX code: AFI) is one of Australia’s oldest Listed Investment Company LICs, being established in 1928. They Manage $8.2B worth of Australian companies with some of their biggest holdings being Commonwealth bank, BHP, CSL and Transurban Group.
AFIC used to reliably pay me about 5% in dividends, alongside juicy franking credits. AFIC charges a low MER of .16% or $16 per $10,000 invested per year. AFIC is also a cash flow or dividend focused investment, and features reinvestment schemes like Dividend Reinvestment Plans (DRP) and Dividend Share Substitution Plans (DSSP) which can be a cost and tax effective scheme.
Argo investments is an old school Australian Listed Investment Company (LIC) which was established way back in the 1940s. That means they have been providing Aussie investors with a reliable income stream for almost 80 years. Argo manages a portfolio of around 100 good quality Aussie stocks currently worth over (AUD) $6.8 Billion.
This is offered with an attractively low management fee MER of .16%, or $16 per $10,000 invested per year, due to Argo’s internal management structure.
BKI (Brickworks) Investment Company Limited is a research driven Aussie LIC which invests for the long term on profitable and high yielding companies. They have been listed on the ASX since 2003 after taking over Brickworks investments, and have their portfolio managed by Contact Asset Management.
They manage (AUD) $1.3 Billion split over 50 Aussie companies, and charge an annual MER of .10% or $10 per $10,000 invested.
My Investment strategy
I have an asset allocation of 3 ETFs (Betashares A200, Vanguard VTS and Vanguard VEU). I started with an even 1/3 spilt of all 3 but last year I decided to shift toward a goal of 50% US shares and then 25% Australian shares and 25% global shares (ex US), and have since continued to focus on global shares with a current split of 60% USA, 25% global and 15% Australian shares.
For a tutorial on how to actually buy shares through Pearler, you can watch this Youtube video HERE – https://www.youtube.com/watch?v=73i8GoxYG-o5
Now that you have your brokerage account set up, you’ll need to transfer some funds into your cash trading account. From there, it’s as simple as selecting the ‘Place Orders’ tab under the Trading menu, and selecting your choice of ETF available on the ASX (Australian Securities Exchange).
Remember you probably want to be purchasing at least $500 to $1000 worth of shares at a time, otherwise the brokerage fee just becomes too high of a percentage. For example, buying $950 worth of shares with a $9.50 brokerage fee means you have only paid 1% in brokerage; with the market average growing around 10% per year, you’d make that back in about a month. But if you had invested only $9.50, your brokerage now becomes 50% of your trade volume, and you’d need to wait 4 years or so to break even.
The good news is, this step is done automatically. In Australia, there is only a couple of share registries and the most common two are Computer-share and Link market services. You will receive an email or letter in the mail (address you set up your account with) with the details from these companies a week or two after purchasing your share. Follow their guidance to set up a user account with the registry, and remember your HIN number may not have a preceding letter when it’s given to you, but in most cases putting an X followed by your ten digits should allow you to register.
The share registries is where you can nominate a bank account for dividends, or elect to participate in dividend reinvestment schemes or dividend share substitution plans.6 They will also take your tax details, and provide shareholder communication such as end of financial year tax summaries for your tax return.
A DSSP is best suited to high income earners, and the bonus shares you have been allocated in lieu of your dividend will be income tax exempt until you sell the shares. This is a tax deferral strategy, which is especially effective if you are never planning on selling shares. Be warned however, if you ever do sell your shares you will then be wholloped with the 1-2 hit combo of both the deferred income tax and capital gains tax if the share price has gone up. This may not be an issue though if you plan to sell the shares in your retirement phase or when your income level is much lower than when you held and received the bonus shares.
“With a DRP, you receive extra shares instead of your dividend, but you need to declare that amount as income and pay tax on it. You also get to use franking credits to offset your tax. But in the eyes of the ATO, you’ve still earned that income and tax needs to be paid. In the case of a Dividend Substitution Share Plan (DSSP), AFIC has a special ruling from the ATO, where you can receive these additional shares and no income needs to be declared. And it’s fully legit! “strongmoneyaustralia.com6
A DRP is best suited to low income earners, or those whose income is on the rise. The bonus shares you receive in lieu of your dividend is taxed at your current marginal rate. It may be beneficial to take the hit now, rather than later.
Final step: Portfolio management
This step is optional, but you’d have rocks in your head if you didn’t go through with it. You need to manage your portfolio to keep track of your investments, if only to provide tax details on the income you earn. My pick on an awesome FREE service is Sharesight. It is completely free to start an account and if you have less than 10 holdings there is no ongoing fees. They provide a convenient summary and easy to use interface, as well as provide all the documents you’ll need come tax time. Before I had Sharesight, I used an Excel spreadsheet which my accountant hated.
You can read my review of Sharesight HERE.
As a final point with portfolio management, any share that is domiciled outside of Australia will mean you could get hit with foreign income tax bills. This can be a ‘double whammy’ unless there is a foreign tax agreement between Australia and the country your ETF is domiciled in. Luckily for the Vanguard VTS and VEU shares that are domiciled in the US, there is a tax agreement between the US and Australia, and you can fill out a simple W-8BEN-E form using the Abridged Computershare process once you register with Computershare and follow their bouncing ball. The Aussie Firebug has a fantastic guide7 and I have linked the video below for you to follow, on generally filling out a W-8BEN-E form.
Captain FI’s closing remarks
Well that was a great beginners intro into what the share market is and buying stocks in Australia for beginner investors!
If your thinking about getting started investing, have a read of the following articles on investing here. I discuss everything from Asset classes (including the old Stocks v Property debate), to Franking credits, portfolio management tools and Safe withdrawal rates.
One of the best tools I have on this website is a review of all of the ETFs and LICs I invest in. Check them out and see whether they are the right investment for you
- Betashares Australian top 200 index fund (ASX:A200) MER = .07%
- Vanguard Australian shares top 300 (ASX:VAS) MER = .10%
- Vanguard Total US Market (ASX:VTS) MER =.03%
- Blackrock iShares S&P 500 ETF Total US market (ASX:IVV) MER = .04%
- Vanguard Total world ex US (VAS:VEU) MER = .09%
- Australian Foundation Investment Company (ASX:AFI) MER = .14%
- Milton investment corporation (ASX:MLT) MER = .12%
- Argo Investments (ASX:ARG) MER = .16%
- Brickworks investments (ASX:BKI) MER = .17%
So there it is guys and girls, all you need to know about the nitty gritty details of buying an ETF and starting your investment journey toward FIRE. Let us know below which was the first one you chose to add to your portfolio, and why!