Investing for Everyone — 7 Principles
According to the ASX Share Ownership study, only 36% of Australians directly own shares (ASX Share Ownership 2014). This looks worse for millennials. Only 15% of 18–24 y.o, and 28% of 25–34 y.o directly own shares. When broken down by gender, 38% of males have direct ownership, compared to 27% of women.
Shares have historically outperformed most other asset classes, including real estate over a 30 year time frame. For example, since 1992 shares outperformed residential property (9.8% vs 9.5%).
High minimum investment amounts, high fees, fears of a stock market crash and a lack of know-how on how to get started are some of the hurdles which commonly deter first time investors.
My team at FirstStep is developing an app which aims to overcome some of these hurdles. The FirstStep smartphone app (iOS / Android) that lets anyone start investing, with as little as $1, by investing their loose change from everyday electronics transactions in a diversified portfolio of ETFs or exchange traded funds. (website: http://getfirststep.com/)
We believe this eliminates the initial hurdles of investing but teaches first time investors the basics of investing by doing so in a small way.
Following are the 7 principles that underpin the FirstStep product.
1. No Minimum Investment
One of the biggest challenges that prevents millennials and first time investors from getting started is the minimum investment amount. Typically, $5,000 is a big upfront amount to allocate to the stock market, which comes with the inherent risk and fear of losing money. Even $500 trading minimums for brokers is a key hurdle, given lack of know-how. So one of the key steps is to reduce the minimum investment amount to $1 or even 1 cent.
2. Non-Committal Contributions
Another key feature was the idea of removing commitment. For example, asking for a fixed amount, even as little as $5 a week is still a commitment. Non-commitment in the contribution amount itself is critical. FirstStep Investing takes away commitment by only investing the loose change from everyday electronic transactions as one goes about ones daily life. Investment amounts are variable and can be topped up with voluntary contributions.
3. Fractional Investing
Following on from no minimum investment amounts and no fixed contributions, there is a requirement for the concept of fractional investing. This is the idea that each investor can hold a fraction of an underlying security. If an ETF trades at a $100, then an investor must be able to invest $10, and hold 0.10 of an ETF.
4. Passive Investing
Passive investing is the idea that one doesn’t try to actively pick stocks (i.e. active management), but develops a strategy that tracks indexes or a broad base of underlying assets like the S&P 500 or the ASX 200. Historically, active management (and its associated high fees) have rarely beaten index or general market performance. The way to do this is to rely on ETFs or Exchange Traded Funds, that track a specific market or index or basket of underlying companies or securities, and have the added benefit of being low cost and liquid, as they are traded on a stock exchange.
5. Pre-Selected Portfolios
A barrier to investing is the lack of understanding of what stocks to buy. Therefore a professionally created investment portfolio with pre-selected asset allocation and underlying securities, generally low-cost, index-tracking ETFs would bridge the knowledge hurdle.
6. Friction-less Signup
Typical funds management on-boarding requires an arduous, costly, time-consuming and paper-based application process. Therefore the key is to remove this intimidating process by taking applications online and processing applications electronically. Ideally on one’s smartphone.
7. Access to Portfolio and Funds
With a smartphone app, an investor should be able to track their investment portfolio and performance in real time, on the go, at any time. Another key feature then is to enable investors to access their funds, in full, at any time.
Therefore, technology, used well, can certainly help to give younger generations a chance to start investing, and build a sizeable investment portfolio over time, with years of compounding working for them and help to secure their financial future.
