Money Magazine Australia - - COVER STORY - AN­DREW ZBIK

To cre­ate wealth, you need a dol­lar to make a dol­lar. $5000 is a small amount to start with. How­ever, it’s a start. Here are some of the op­tions that I would look at:

1 In­vest in an Aus­tralian eq­uity ETF

$5000 is too small in my opin­ion for in­di­vid­ual share trad­ing and stock se­lec­tion. Also, the track record of most ac­tive eq­uity man­agers is now some­thing to ques­tion. Over the past five years, 69.88% of Aus­tralian eq­uity gen­eral man­agers have un­der­per­formed the ASX 200. For in­ter­na­tional eq­uity man­agers a stag­ger­ing 93.15% un­der­per­form the in­dex. Ouch! I used to rely solely on stock-pick­ing for my clients. I don’t rely on it as the sole eq­uity strat­egy any more.

The most ap­pro­pri­ate way to get ex­po­sure to the eq­uity mar­ket with a small amount of cash is via an ex­change traded fund. With an ETF you gain a broad bas­ket of di­rect share­hold­ings that mimic a cho­sen in­dex. The fees are sub­stan­tially lower than those of a tra­di­tional man­aged fund and there is the ben­e­fit of daily liq­uid­ity on the se­cu­ri­ties ex­change.

One of my favourite ETFs is iShares Core S&P/ASX 200 (ASX: IOZ). It in­vests in the top 200 com­pa­nies on the Aus­tralian stock­mar­ket. The div­i­dend yield is cur­rently 3.22% (or 4.33% fully franked). The man­age­ment fee is 0.15%, so your only other cost would be bro­ker­age.

Since the ETF’s in­cep­tion in Oc­to­ber 2010, it has pro­vided a to­tal an­nu­alised re­turn of 7.42%. Thus in 32 years you will make your $50,000 tar­get. I am cur­rently us­ing an 8.5% to­tal re­turn fore­cast for the Aus­tralian mar­ket over the long term, so based on that as­sump­tion we would ex­pect to achieve our $50,000 tar­get in 25 years in­stead. Will you still be work­ing then?

In short, with­out ad­di­tional con­tri­bu­tions to an eq­uity port­fo­lio you can see it will take a long time to get to $50,000. Pure eq­uity strate­gies work when you make reg­u­lar con­tri­bu­tions as part of a sav­ings plan. The rate of re­turn on equities is higher than cash and that is where you will achieve a bet­ter out­come than sim­ply hav­ing your cash in a high-in­ter­est ac­count. How­ever, I rec­om­mend that my clients com­mit their cap­i­tal for a min­i­mum of five years when em­bark­ing on any eq­uity strat­egy.

2 In­vest in a geared fund

Have pure equities got you ex­cited? How about we add some gear­ing. This is where you con­trib­ute a dol­lar and bor­row some money against that. Some op­tions that are avail­able on the mar­ket are geared man­aged funds and geared ETFs.

The graph (be­low left) shows the re­turns of one geared man­aged fund I have looked at: BT Geared Im­pu­ta­tion. You can see that a di­rect ETF in the Aus­tralian mar­ket would have per­formed bet­ter. The graph shows the price changes over 10 years and if we in­clude the dis­tri­bu­tions the re­turn for the BT fund has been 3.47%pa. Thus our $5000 would take 67 years to reach $50,000. To be fair, this was dur­ing the GFC but it is a good ex­am­ple of how gear­ing can mag­nify your losses in an eq­uity port­fo­lio.

Based on a long-term as­sump­tion of 9.5%pa to­tal re­turn for a port­fo­lio with 40% gear­ing, with a fee of 1.95% for the man­aged fund op­tion, it would still take us 41 years to reach $50,000. Unfortunately, half the re­turns would be eaten up by in­ter­est costs and man­age­ment fees. A geared ETF such as the Be­taShares Geared Aus­tralian Eq­uity Fund (ASX: GEAR), which has a man­age­ment fee of 0.80%, would fare slightly bet­ter.

3 Frac­tional prop­erty in­vest­ing

Prop­erty has given great re­turns and prospects of cap­i­tal growth due to gear­ing. How­ever, we know $5000 is too small to buy a prop­erty on your own. In re­cent times we have seen the emer­gence of frac­tional prop­erty in­vest­ing. This is where a syn­di­cate of in­vestors come to­gether and pur­chase a share in a di­rect in­vest­ment prop­erty. Firms such as Do­ma­com pro­vide the abil­ity for a pool of in­vestors to make a con­tri­bu­tion to the pur­chase of a di­rect in­vest­ment prop­erty. The gear­ing in a Do­ma­com fund is lim­ited to a max­i­mum of 50%.

In my cal­cu­la­tions, I looked at a $650,000 prop­erty pur­chased with a 40% loan-to-value ra­tio. A $5000 con­tri­bu­tion to the syn­di­cate would equate to a share of around 1.2% of the eq­uity in that prop­erty. With prin­ci­ple and in­ter­est loan re­pay­ments, in 32 years your 1.2% share, based on a prop­erty val­u­a­tion of $4.195 mil­lion (as­sum­ing 6%pa cap­i­tal growth rate) would achieve our tar­get of $50,340.

4 Pri­vate eq­uity and cur­rency

These are some as­sets that can pro­vide re­turns greater than the tra­di­tional equities and prop­erty. In­vest­ments in fin­tech, pri­vate eq­uity and pri­vate busi­ness can pro­vide re­turns of up to 20%pa. With a 20%pa re­turn we would reach our $50,000 tar­get in 13 years. Now this is look­ing bet­ter.

The prob­lem is for most in­vestors is that to ac­cess these op­por­tu­ni­ties you need to be con­sid­ered a “so­phis­ti­cated in­vestor”. A so­phis­ti­cated in­vestor is a per­son who has a net wealth of at least $2.5 mil­lion and/or has de­rived a per­sonal in­come of at least $250,000pa over the past two fi­nan­cial years. I don’t think too many peo­ple look­ing to start with in­vest­ing $5000 are in this sit­u­a­tion. Most of the pri­vate eq­uity funds and fin­tech funds we have rec­om­mended to our clients have been for so­phis­ti­cated in­vestors.

In­vest­ing in cur­rency is hard. A re­port by BIS shows that up to 60% to 80% of trade in the Aus­tralian dol­lar is spec­u­la­tive. I ac­cept that my ex­per­tise does not cross over to for­eign ex­change. (My pro­fes­sional

qual­i­fi­ca­tions in­clude a law de­gree, busi­ness ad­min de­gree, fi­nan­cial plan­ning qual­i­fi­ca­tions and real es­tate qual­i­fi­ca­tions.) Cur­rency trad­ing is an area for spe­cial­ists and I am yet to come across a re­tail in­vestor who has made money from cur­rency trad­ing. In­vest­ing is partly about know­ing your lim­its.


As you can see, aim­ing for a ten­fold in­crease in your cap­i­tal in the short term is a big ask. If it were that easy ev­ery­one would have done it. And, frankly, I would not be sit­ting here as a fi­nan­cial plan­ner be­cause if I had en­joyed a ten­fold in­crease in my in­vest­ments over the past five years I would not be writ­ing this ar­ti­cle for you.

If you are not for­tu­nate yet to be a so­phis­ti­cated in­vestor or busi­ness owner, I rec­om­mend a strat­egy of start­ing with a small cap­i­tal base and mak­ing reg­u­lar con­tri­bu­tions to that as­set.

For ex­am­ple, if you had started with $5000 in the iShares Core S&P/ASX 200 ETF two years ago and made a $1000 con­tri­bu­tion ev­ery month, your port­fo­lio would be val­ued at just un­der $30,000 to­day. Your profit so far would be $1284 or 4.47%. This re­sult is in a mar­ket that dropped by al­most 20% in the pe­riod and then re­cov­ered.

In­vest­ing is a long-term project.

An­drew Zbik is se­nior fi­nan­cial plan­ner at Om­ni­wealth. om­ni­wealth.com.au

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