Join our investing community

"You're too young"

Discussion in 'Investing Strategies' started by Meggsy, 16th Feb, 2007.

  1. Meggsy

    Meggsy Well-Known Member

    Joined:
    15th Feb, 2007
    Posts:
    61
    Location:
    Brisbane, QLD
    I started investing about half a year after I turned 18. I'm now getting close to 20, I'm at uni fulltime and I work casually (average of 25 hours a week but can be as low as 15 or up to 35).

    I feel I'm currently stagnant with my investing process, almost to the point where I'm becoming frustrated. My parents say I'm doing fine as I am, however I'm someone who always wants to do better, learn more, try something new.

    I guess I'm just after a few suggestions of other things I could do as I'm quite new to the whole investing thing.

    I work on an ITHelpdesk and it pays quite well, I have no debt, I live at home and my expenses consist of uni fees, books etc, fuel, rego, insurance for my car and about $50 a week to spend.

    For the last year I've been investing $1250 a month into managed funds, this combined with the initial amount + growth has them currently worth just under $30 000. I also put an extra $350 aside each month which I used to buy into a new fund every few months, however I think 5 different funds is now diversified enough.

    I could just keep doing what I'm doing, like my parents suggest to, however, I know I've started early and I realise I've got a great chance to buildup quite a substantial amount of capital before things such as a house, wife and kids come along :) I guess in a nutshell I want to ensure I'm making the most of my opportunity.

    I have no work deductions, I earn about 35k - 40k a year in wages (obviously as a casual the amount will vary, but that is roughly correct). My work hours aren't stable enough to take out a margin loan, but someone has suggested gearing by installments and prepaying the interest. It has also been suggested that I'm 'too young' and not in a stable job for any type of loan. I agree with the job part, although it is reasonably secure, I hate the 'too young' part though LOL.

    My goal is to generate enough capital to use it towards a house in 5 or so years time and then borrow to invest. I have about 7k sitting in a high interest bank account; this can be withdrawn at anytime.

    Also, I have all the funds in my own name, should I be using a different trust structure? I read 'How to legally reduce your tax' but I posed more questions than answers for me. I realise there is an importance of getting it right now as it can be quite costly in the future to change. However, I also realise the rules change every year.

    Any thoughts would be appreciated :)
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,623
    Location:
    Sydney, Australia
    There's very little advantage to you tax-wise in using a trust - the main tax benefit a trust structure offers is in the flexibility to stream income to the lowest income earner - ie you or your partner. So if you are single, there's not much point.

    You also need to take into consideration the expense in running a trust - it will eat into your returns ... so probably not worth it at this point, unless you see yourself moving into a field of work where your assets will be at risk (eg professional such as accountant, doctor, dentist, company director, etc).

    I'm in favour of acting with the "end" in mind - people may say your assets aren't large enough to justify a trust at this point ... which may well be the case - especially if you don't intent to accumulate more assets, but what about the future ? Especially with real estate - it is a non-trivial exercise (cost-wise) to move assets into (or out of) a trust ... so it is an idea to think about where you want to be in 5/10/20 years time.

    At least with managed funds, you have less of an issue - the costs to move aren't as great as with property (stamp duty is a killer), although you still need to take CGT into consideration.

    It's probably worth waiting until you start buying investment properties to consider a trust ? You don't have to rush into anything now anyway - plenty of time to learn the ins-and-outs and make a decision when you are more confident.

    Although shares and managed funds are doing really well at the moment (especially in comparison to real estate), I still personally think that real estate should form the basis of any investment portfolio - the stable asset base and extremely high leverage possible means that you can control a lot more assets for a lot less initial capital.

    The main issue with real estate is that you generally don't get much flexibility in repayment options - so if you can't rely on your income for servicing the debt, you may have problems. Perhaps waiting until you have a stable income before you look at real estate.

    My first preference would be to look for investment properties before you buy something to live in - that way you get the tax man and your tenants to help you pay for it. That's not a hard rule though - if you really feel the need to live in your own place - it's still a growth asset (if you buy the right place), and you can access the equity you will build up for investing ... it will just cost you more, since the interest on your initial loan isn't tax deductible.

    As for being too young ... get yourself a credit rating !! Do you have a credit card ? If not - get one with a small credit limit and make sure you pay it off automatically at the end of each month. Interestingly, this helps you with credit applications in the future - showing that you are responsible enough to manage a credit card. Just don't go overboard !!!!!!!

    Well done - you're doing really well so far ... and have set yourself up for a very positive future.
     
  3. Meggsy

    Meggsy Well-Known Member

    Joined:
    15th Feb, 2007
    Posts:
    61
    Location:
    Brisbane, QLD
    I've had a credit card for about a year now (I got one when I started the Helpdesk job) and I put everything on it, my wallet only ever has $30 in it. I pay it off each month and it has no fees because I'm a student - what a way to get 55days interest free haha :)

    What do you think about the installment margin loan? At this stage I couldn't purchase a property, however once I finish uni and get a fulltime job I'll look into it.
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,623
    Location:
    Sydney, Australia
    I've never used an installment margin loan - so I'm not that familiar with the ins-and-outs of them. I do think that margin loans are a good way to build wealth though - I love their flexibility (eg the option to capitalise interest, draw down at any time, pay off when you're ready, etc).

    I wouldn't imagine you'd have too much trouble getting a margin loan - you have over $20K worth of funds (so you can get the minimum $20K margin loan easily), and most margin loans are not income-tested.

    Don't installment margin loans require you to make regular deposits ? If your income isn't reliable enough, perhaps it may be better to try for a regular margin loan and just do it all at your own pace ?
     
  5. Glebe

    Glebe Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    932
    Location:
    Sydney, NSW
    Meggsy,

    You're net worth is $37 000 and you're 19 years old. I'm 29 and you're worth more than half of my friends. You're doing really really really well.

    Keep doing what you're doing and you'll find when you finish uni, get a fulltime job etc your wealth will springboard further.

    Just ensure you don't buy a sportscar or lose your way with expensive women!! :eek:
     
  6. Meggsy

    Meggsy Well-Known Member

    Joined:
    15th Feb, 2007
    Posts:
    61
    Location:
    Brisbane, QLD
    Haha... sports car - no - Dad is a self employed mobile mechanic, he made sure I got a nice little Toyota Corolla, few years old and cheap enough to buy without a loan but still well maintained. I'll tell you what, fuel is a killer though (even with the 10c/L that the QLD govt chips in). With the new Green Bridge in Brisbane I might go back to bussing to uni.

    The girls will be something I'll have to watch though ;) lol.
     
  7. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    Of course you're too young!...Too young and foolish to listen to the nay-sayers and others who want to hold you back out of jealousy. You'll just go your merry way steadily and sensibly building your wealth...what a bummer! :D

    Most Aussies are happy for people to get ahead...just not ahead of them.

    Ditto Glebe's comments. You're doing well. Just keep on doing what you're doing and explore and critically examine the additional investing opportunities over time.

    Cheers
    N.
     
  8. iiinvestor

    iiinvestor Well-Known Member

    Joined:
    1st Feb, 2007
    Posts:
    121
    Location:
    Sydney
    Meggsy:

    That's a great story so far, nice work!

    A couple of questions... Why do you want to wait 5 years for an IP? Is that when uni will finish? I'm definitely not alluding to an imminent property boom; just keep your mind open about buying an IP. It may be easier than you think.

    Also, why so much cash sitting in the bank? A lot of people here seem to hold no cash even with a lot of property. Are you dollar cost averaging into funds with that money or just keeping it for a rainy day?

    Lastly, to address your initial frustration with being stagnant... the short answer is: a) you need to start gearing, and/or b) you need to make more money. The only other way is to chase higher returns, but I think that will only lead to lots of risk and lots of tears.
     
  9. Meggsy

    Meggsy Well-Known Member

    Joined:
    15th Feb, 2007
    Posts:
    61
    Location:
    Brisbane, QLD
    I'm feeling quite encouraged, thank-you all :) The reason I found this site was trying to Google installment gearing. I went to the bank this afternoon to get an idea on what they could offer, it was super busy so I just picked up all the booklets I could get on investment loans etc and I'll have a read over the weekend.

    Well I have 2.5 years left of uni, I wouldn't want to borrow a serious amount of money until I have a fulltime job. 5 years wasn't a set time, just a rough thought of when I might look into it seriously. I'd also be a little worried with tennants - maybe I've just been watching too much TodayTonight. I am however concious of the fact that property isn't going down in price... the earlier I can get in, the better.

    No reason for cash in the bank, I put $1250 a month into my managed funds ($250 each fund) and so I like to keep 2 months worth as a buffer for that. I'm going to Alaska later this year, so I've got a bit kept out for that (family holiday, only my spending money). I'll have a few uni expenses soon with the start of semester too. I guess there is no 'real' reason I keep cash besides paying for those few things. I've done a fair few accounting subjects at uni, do you think 1:2 - short term debt:cash ratio is usually enought?


    I came to the same conclusion and I currently can't see a way of making more money without investing more time, I already work around 25hours a week, 20 uni contact hours, 2 team sports + family and friends time. Looks like gearing is something to seriosly consider.

    Chase higher returns... one word comes to mind right about now... Westpoint.

    With gearing, are there any tips that you have? Things I should look into such as installment options vs lump sum, prepay interest, how much i.e. $1 for $1 or more/less? Does anyone else besides banks offer these services? If you gear via lump sum opposed to installments, does that mean you don't dollar cost average? With the stock market up so high currently I wouldn't want to stick it all in only for it to crash (my parents invested for the first time back in 2001 - 80k turned into something closer to 50k within a week, mind you they still own the funds and they have since doubled in value - time in the market not timing the market).

    Anyway, thanks to everyone for your help so far :)
     
  10. bundy1964

    bundy1964 Well-Known Member

    Joined:
    22nd Dec, 2006
    Posts:
    351
    Location:
    Adelaide, SA
    Your never too young to borrow money :D

    There will be days you bleed with borrowed money, today is one of those days for me. Managed funds are a bit of a bet each way first you are betting on a rising market and secondly that the fund managers can make better choices than you can. Time in the market does cover for many short term timing errors. Funds and fund managers are good for diversification and as a learning base for the future. In an ideal world you would have funds that cover property localy and internationaly, Australian shares and international shares as well as cash/others. Residentual stuff you have to go and direct invest although there are hand holding services available for a price.

    An investment in a good woman does pay off too :p
     
  11. Meggsy

    Meggsy Well-Known Member

    Joined:
    15th Feb, 2007
    Posts:
    61
    Location:
    Brisbane, QLD
    Just looking at a PDS, it says high risk, but I don't understand why. I can't see how you would ever lose all of your money with one.

    For examle, I have the CFS MIF Geared Share Fund...

    http://www.colonialfirststate.com.au/Prospects/FS1631.pdf

    Top 10 Holdings Nov 30 2006
    1 BHP Billiton Limited 10.11%
    2 National Australia Bank Limited 5.60%
    3 Commonwealth Bank of Australia 5.21%
    4 Australia and New Zealand Banking Group Limited 4.62%
    5 Westpac Banking Corporation 4.18%
    6 Rio Tinto Limited 3.74%
    7 Macquarie Bank Limited 3.45%
    8 Brambles Limited 3.34%
    9 AMP Limited 3.02%
    10 Transurban Group Stapled Security 2.62%

    I know large companies have gone bust in the past, Enron, HIH, OneTel etc etc, however, correct me if I'm wrong, but to lose your money in a fund, all of those companies would have to go bellyup along with the companies outside of the funds top 10 holdings?

    If the market drops/crashes you only lose money if you pull out, and from the graphs I've seen the market has always eventually risen above the last high point.

    I've been reading the other threads around here and I came accross one about Woolies shares and their mate was spending 25k on a car, I loved that story, as the author pointed out, that car is pretty high risk compared to the shares to me.
     
  12. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,623
    Location:
    Sydney, Australia
    Risk means a lot of different things - and different things to different people.

    For someone whose sole source of income is their portfolio, a highly volatile fund which may see some seriously negative years (eg a geared share fund) is high risk, despite the fact that it may invest only in Blue Chip shares.

    There is "losing all your money" and then there is "failing to make a profit" and then there is "failing to make a profit because your costs are too high" ... they are all different scenarios - and all considered as "risk" of some form.

    You are going to have to think very very carefully about that.

    Trust me - it's not as simple as it sounds ... and it can REALLY hurt your progress towards you goals to hold onto a poorly performing asset. I'm not saying you should necessarily sell - but the whole "you only make a loss when you sell" mentality is what stops many people from becoming wealthly.

    You need to come to terms with it in your own way - and develop your own strategy for dealing with it.

    I'll give you a hint to start you thinking ... "time".
     
  13. iiinvestor

    iiinvestor Well-Known Member

    Joined:
    1st Feb, 2007
    Posts:
    121
    Location:
    Sydney
    Don't get me started. My latest rule is to never again rent to two girls! :)

    I assume by 'short term debt' you mean current debt - due within the year. In that case if you're part time, have somewhat unstable cash flows and not the best job security, maybe it's a good measure to hold on to a bit more - like you are.

    Very cool. I was very close to going at the start of the year, but am now leaving it until April next year. I'm not sure if it's your cup of tea, but I want to plan my trip around doing the 12 day mountaineering course at AMS. I already talked the better half into doing it, so I just need to set a date and make some time. Suffice to say I'm jealous you're going this year!

    The more the better!!! :D Only joking... of course. It's really going to depend on what you're willing to handle and your cash flow. You could go and gear to 70% tomorrow, the market could drop 30%, you'd get margin called, you may feel pressured to sell to stop your losses and then you'd have lost all of your equity and would be starting with $0.

    Maybe my one tip would be to make sure your investments are diversified enough before you add gearing.
     
  14. coopranos

    coopranos Well-Known Member

    Joined:
    11th Oct, 2006
    Posts:
    498
    Location:
    Perth
    As Sim said, this is dangerous thinking. It makes about as much sense as dollar cost averaging and portfolio balancing. Dont make the mistake of holding onto a poorly performing asset to avoid crysalizing your losses.
     
  15. Meggsy

    Meggsy Well-Known Member

    Joined:
    15th Feb, 2007
    Posts:
    61
    Location:
    Brisbane, QLD
    The only debt I have is a credit card, which is always paid in full monthy. I also have the $1250 that goes into my funds monthly... which leads to my next question...


    Are you suggesting dollar cost averaging is not always a good idea?

    How do you mean? With the managed funds I have they suggest 5-7year timeframe, are you suggesting that if they had halved in value within two years you might look at selling them?

    We are doing a boat cruise, which should be great. Also a few weeks around Canada in a car and San Fransisco... I can't wait to go to Alcatraz...


    I did some calculations, and it seems I would only be about $25 000 better off after 5years of gearing at 50% once everything had been paid back. I assumed 15% returns and 9% interest. I'd contribute $1250, the bank would match me, total os $2500 a month. Does this sound right? Or have I calculated something wrong?
     
  16. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,623
    Location:
    Sydney, Australia
    It depends on your goals, and to a degree, why the fund is going down (and by how much).

    Personally, I'm not the type to sell because of a market "correction" - corrections usually get corrected themselves in due course - and with the right types of funds, you make much more money on the upswing than by trying to time the downswing. Trying to time the sell and then buy-back-in can be problematic ... if it is a short term correction, by the time the indicators show that you need to sell (or should be buying back in), you've probably missed most of the action, and would have been better off just riding it out.

    However, if it really is a fundamental change in market attitude - if the market is in a sustained downswing, or the market sector your fund invests in is entering the regular down part of the cycle (most markets are cyclical), then you really need to consider the cost of having your money sitting in that fund not working for you.

    It's not an easy thing to get right - and picking between a short-term correction and a long-term change in the market is not easy without a crystal ball ... although you should get some indication by looking at the fundamentals that drive the market ... if the fundamentals haven't changed - it's likely to be a short term correction, which will swing back upwards in due course.

    Note that some people here advocate trying to time those short-term corrections to take advantage of opportunities to sell near the peak and buy back in cheaper. Personally, while I think this is a good strategy for share traders, I think it is a bad idea for long term investors - especially those in managed funds.

    As I alluded to before ... if your goals state that you need to leave your money where it is for 5-7+ years, then sure - leave it there. You'll do okay over the long term.

    But think about this - you worked hard for your money. The money you invest is most likely from after-tax dollars. You had to put a lot of time and effort and sacrifice into getting enough to invest. So shouldn't you expect your money to work for you ? Having it sitting there failing to keep up with inflation for long periods of time ... means you are losing the value of you money - your hard work is going down the drain.

    The key factor here is time. You spend all your time to make money so you can live. You sacrifice lifestyle to save money so you can invest. You invest your money so you can have your money start to work for you. The goals is to have enough money working for you that you no longer need to work - and you can then enjoy the lifestyle you sacrificed to get there. You are buying time with money - otherwise what's the point if you never have any time to enjoy it with ?

    The trick is that you only have a finite amount of time given to you - everyone dies eventually (and you don't know when that will be). If you let your money be lazy and non-productive, it is costing you dearly in time ... the one commodity you cannot gain more of.

    The hard part is knowing when (and if) to sell. You need to make your own judgement call on that. Sometimes you will get it wrong - but you make the call based on the information you have available at the time, and based on your goals. Always remember to look at the fundamentals - if the fundamentals have changed, you need to reassess your position with the investment.

    The key is that if you have other funds that are performing well - why not put more money into them ? Take the money you have and put it to work - don't let it be lazy.

    Let me put it another way.

    If your investment drops in value by 50%, you don't lose any money by selling ... you've already lost the money !! It doesn't magically re-appear just because that money was there in the past ... it has to re-earn it to get back to where it was. The investment has to work just as hard as any other investment to make money ... so unless you honestly think that this investment will work harder than any other investment from here in, you would be better to move what money you have left into another investment that will do the work for you.

    Note that this example explains why I believe it is a bad idea to try and time short-term corrections for managed funds versus long term fundamental changes. My previous paragraph stated "[the money] doesn't magically re-appear just because that money was there in the past" ... I need to point out that some funds (especially those that DCT, but other funds as well) will take the opportunity to buy into oversold shares when the market corrects - and when the upswing happens, they will magnify their profits significantly. They are doing the work for you to make the most of those corrections. If you try and time it yourself, you'll probably miss out on the best of those gains.

    I sold out of 6 of the 11 funds I held last year ... and I've not regretted any of them (despite one going up 10% in the month after I sold *sigh* ) - because I had a goal and I have reinvested the money into funds that have performed really well. Several of the funds I sold out of have gone backwards further in that time, and others have returned less than 2% - pathetic.

    So, in answer to your question (sorry - got a bit carried away with the answer !!) ... if a fund I was holding was in a sustained downtrend and I didn't think the fundementals of the market indicated it should reverse anytime soon, I would definitely sell out. Would I sell out if it already was 50% down ? Yes, unless I thought it was about to do a major reversal and outperform anything else I could put the money in now !!

    PS. If you work out a way of determining the best time to sell out of an investment, let me know okay ? I'd love to know the answer :D

    PPS. this is all just my opinion ... feel free to disagree - but tell us why!
     
  17. bundy1964

    bundy1964 Well-Known Member

    Joined:
    22nd Dec, 2006
    Posts:
    351
    Location:
    Adelaide, SA
    I would have to agree not to short term trade managed funds for profits. For a long term buy I would rather come in after a distribution than just before one but that is personal preferance.

    I do like trying to pick the right spots for long term buys rather than just picking the right stock, buy enough right ones you can then pick a free one from CG if you are working on margin loans.

    Dollar cost averaging is great for building up managed funds and while it works for shares I think value investing comes out in front it is a little harder to add an extra layer to your investment picks, it saves you cash up front that can be used for extra investments.
     
  18. Meggsy

    Meggsy Well-Known Member

    Joined:
    15th Feb, 2007
    Posts:
    61
    Location:
    Brisbane, QLD
    Thankyou for the detailed response, I really appreciate it. I don't really have enough experience to openly disagree with anyone, so I think I'll take it all on and make a decision based on what people have said when the time comes. Currently everything is doing well but it seems we could be at the end of the boom-bust cycle.

    If you had $2500 to invest, would you do it now, or would you hold off until the market drops a bit?
     
  19. iiinvestor

    iiinvestor Well-Known Member

    Joined:
    1st Feb, 2007
    Posts:
    121
    Location:
    Sydney
    A quick search on Morningstar reveals that it is about three times more likely that a fund will do below 0%pa return over 7 years than it is to do over 20%pa over 7 years. It was only a very basic search, but it puts it into perspective.
     
  20. Meggsy

    Meggsy Well-Known Member

    Joined:
    15th Feb, 2007
    Posts:
    61
    Location:
    Brisbane, QLD
    It does indeed put it into perspective.