Say What Wednesdays

High Roller; Start Investing with $1,000

Welcome to Finance & Fury, the Say What Wednesday edition, where we answer your personal finance questions each week. Today’s question comes from Tara;

“Hi Finance & Fury, love the show! I was wondering whether you would be able to provide advice on the best way to invest $1,000 – $2,000? Would love to hear your suggestions?” – Tara

Awesome question and thanks for getting in touch! Not technically allowed to provide ‘advice’ – but I can give a general outline on what to look for when starting to invest.

Starting to invest is hard – especially when you don’t have 10s or 100s of thousands of dollars.

  1. Hard to get diversification
  2. Hard to get low cost
  3. Hard to get in based on minimums

Where to start

  1. What are your goals?
    • How long is it for? – Investments should be made for the long term. If you’re at a timeframe under 3 years, I probably wouldn’t suggest investing at all
    • Will you need to access it at any point? – If yes, how long?
      • If you need to access the funds in the short term (3-5 years) something more defensive would be better
      • If you’re looking at longer (7-10 years), it’s safer to invest in growth assets
      • If you’re looking at an even longer time frame, or you don’t need the funds until you’re 60, you could consider a different environment all together, like super.
  2. How much risk do you want to take on?
    • Determines the allocation between growth to defensive
  3. Will you be making further investments?
    • Determines what type of investment
    • Buy sell vs brokerage – fixed dollar transaction costs can really add up when compared to costs that are based on a percentage of the investment amount.
  4. Keeping costs low
    • Transaction costs
      • Brokerage can start eating away into your capital
      • Buy Sell spreads
    • Platform costs/Brokerage accounts
      • Accounts charge
    • Getting diversification at low costs
      • With $1,000 your investment options are limited to get many different underlying funds
      • Need a range of shares across different countries. You need a range of asset classes as well.

Some scenarios

Let’s look at 4 different options for investing $1,000

  1. Shares
    • Purchase one share for $20 brokerage (2% transaction cost). This is not great.
    • Direct shares – One share offers no diversification and is open to high volatility
    • LIC – Has diversification, but in one asset class with about 20-50 holdings on average
  2. Managed funds
    • Buying directly from the manager isn’t an option as they have minimum initial purchase amounts ranging from $10,000 to $500k
  3. Platform
    • Purchase managed funds on a platform to get around the minimum buy-ins
    • Platform – Probably looking at $200 in admin costs per year = 20% of the value in this case.
  4. ETF
    • Single ETF – you can get an index fund, which provides a fair amount of diversification within an asset class
    • Multi-managed ETF – Single purchase for $20 brokerage, you could pick up 7 or more other indexes
  5. Superannuation
    • Contributing to invest inside superannuation – WARNING: won’t have access until you’re 60 years old – so this is for the very long term
    • Non-Concessional (Personal) Contribution (NCC)
      • Works well for those with a low taxable income (less than $36k including Salary Sacrifice or Fringe Benefit Tax)
      • Post tax contribution
      • No contribution tax paid going into the account (Low Income Superannuation Tax Offset). This is capped at a maximum offset of $500.
      • Effectively turns $1,000 into $1,500 invested – in addition this sits in a lower tax environment
      • Example – buy the same investment in super as a NCC vs buying an investment personally (outside of super)
        • Assuming 8% p.a. for 30 years
        • Personal – $1,000 at a 21% tax rate = $7,960
        • Super – $1500 at 15% tax rate = $12,770 (60% more over a 30-year period)
    • Concessional (pre-tax) Contribution (CC)
      • Better for those with a higher taxable income, but look out for the concessional contributions cap
      • Contribute $1,000 and reduce your taxable income by that amount by claiming a tax deduction on it. E.g. Earning $100k = $390 of tax back personally.
      • Effectively turns $1k contributed into $850 invested, once super contribution tax has been taken out

In Summary

  1. Look at the diversification!
  2. Compare the upfront and ongoing costs
  3. Make sure it lines up with your goals and investment time frames

As always, if you have a question you want answered on Finance and Fury, get in touch with us on the Finance & Fury website contact page.

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