Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime. This profound proverb rings true with the idea of investing in stocks. The main goal of The Informed Investor is not to provide hot speculative stock tips that could possibly make you rich. Such an offer probably seems too good to be true… and it generally is. I intend to inform the reader with the potential strategies that can be utilised to achieve financial freedom; the ability to live purely on the income generated from investments. As the man is taught to fish, I will teach you strategies to invest. We will also delve in to the philosophy and psychology behind attaining financial freedom.
Many people bite at the opportunity of get rich quick schemes. This is NOT a get rich quick guide. I intend to provide a sustainable solution for generating positive cash flows significantly higher than that earned by leaving your money in a bank, while maintaining a low investment risk. We will look in to low risk, high dividend (interest) paying stocks. A lot of people scorn at the idea of investing in stocks, simply due to the risk and complicated terms that are associated with stock investing. Within the realm of the stock market there are hundreds of different strategies you people can use. These range from highly conservative low risk, diversified investments to highly speculative, extremely risky investments. We should not be deterred by stocks just because we don’t understand them. Instead we should become informed around basic strategies that could aid us in generating more wealth and minimising financial burden.
Let us start with a simple example of the opportunities that can by realised through stock investing. We will start with a fun fact that many people probably don’t realise. At the time of writing this article, NAB offers a high savings account with interest of 2.55 %. Want to take a guess at what you can earn for investing NAB stocks? An astounding 7.86 %. Simply put, by purchasing stocks in NAB you will currently earn 308 % more money each year than putting your money in their high savings account. Now let us consider this over a 10-year period. By placing $100,000 in a high savings account you would earn $28,634 after 10-years. If you invested in NAB you would have earned $113,110. “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it” – Albert Einstein. This effect is exacerbated by compound interest. After 10-years this difference is no longer 308 % but a staggering 395 %!
By now as a reader you probably have some degree of scepticism so I’m going to try and quash any doubts you may have.
Q: “But what if I want to sell the stocks and get my money, won’t that be difficult?”
A: Unlike other forms of investment such as bonds and realestate, stocks are bought and sold on a regular basis. This basis depends on the stock you own and is referred to as the liquidity of the stock. By purchasing a high liquidity stock, on any given day you will be able to sell your stocks and get your money back. However, it is important to note that the price of stocks constantly fluctuate whether it be in small or large amounts. This means that if you desperately wish to access your funds and the stock price is down on a given day, you may have to take a loss.
Q: “How do I start an investing account? It seems too difficult and I don’t know where to start.”
A: It is very simple to start an investing account. Part of this reason is due to accessibility to the internet and the fact that stockbrokers want your business. Nowadays you can simply make an account with a stockbroker and with a few taps of your mobile screen, purchase stocks. An example of a stockbroker is CommSec, which is apart of the Commonwealth Bank of Australia. It is easy enough to go online and follow the instructions to create an account. It is also important to note that brokers charge a small fee every time you buy and sell stocks. This amount changes between brokers but is generally around $20 every time you buy and sell a particular stock of any given quantity. For this reason it is recommended to only buy and sell stocks at a minimum quantity of $2,000 to reduce the impact of brokerage fees.
Q: “What if the stock price goes down? It seems too risky to me.”
A: This is a very common query when it comes to stock investing. By investing in blue chip stocks with minimal risk and strong dividends (effectively interest payments), you protect yourself against price drops. This is further mitigated by divesting in multiple stocks. The purpose of the companies you will invest in is to make money for their shareholders. They aren’t trying to steal your money.
Q: “That’s all great and everything but where the hell am I meant to get $100,000 to start investing?”
A: Well that’s the thing, you don’t need $100,000 to start investing. I’d recommend starting with as little as $2,000 and regularly investing more money in to stocks over time. This comes down to the philosophy behind investing. You may need to make sacrifices in your life such as cutting back on alcohol, eating out or purchasing coffees. By doing this over time you will have additional spare cash that you can begin to invest. Look at it this way; that $20 you spent on smashed avo on toast is $20 + $22.60 you would have lost in dividends at 7.86 % interest over 10 years. Would you pay $42.60 for smashed avo on toast? Didn’t think so.
Jordan Bentley – BEng(Chem)(Hons)/BMath(Dist)
The Informed Investor 