How do you start investing when there is non-stop talk of overpriced assets, inflated Sydney property prices, the stock market rallying and the ‘end is nigh’ Homers are dinging their doomsday bells in the street?
Making my first investment was absolutely terrifying. Thoughts that ran around my mind like a hamster in a hamster wheel were ‘What if I bought at the peak and the market crashed? What if I lost all my hard earned money?’.
As a first-time investor I was squirrelling away cash into a e-trade account with my eyes on low cost Vanguard’s Australian Shares Index Fund (a.k.a VAS – indexed on S&P300) as an entry-level first investment.
Months passed and I kept hesitating buying anything due to markets rallying higher and higher, so thought I should wait until a crash to get the best price.
And so last year in the lead up to the US election, the VAS dropped from $70.75 to $65.62 in a month. Did I buy then? No. I knew it was plummeting but thought I’d wait for it to crash further.
What did I learn here?
- Emotions get in the way of investing:
Fear of losing means that you get blinded by greed instead of opportunity. Market crashing but still not buying? You may already be at the bottom of the trough. Market rising? You may not yet be at the top of the peak. Not buying means you miss out of those possible gains.
- Dollar cost averaging actually works:
I bought 28 shares in January and another 27 exactly 2 months later in March. While there were fluctuations in profit (brokerage fee already taken into account), the market hasn’t crashed AND I’m still in the green.
- Brokerage fees counter-act the benefits of timing the market:
Given my income, I’m only able to afford investing $2000 every couple of months. With brokerage costing $20 a transaction, waiting for the shares to drop 50c barely makes any positive difference given the high transaction fees.
- The world isn’t going to end:
Investing an index fund means that your investment is never going to drop to $0 unless the entire share market ceases to exist. Investing in an index like VAS which is indexed on the Australian S&P300 so may fluctuate in value but will never be worthless given the S&P300 is self rejuvenating and re-assesses which companies are part of the top 300 given it’s market cap. If one company goes bankrupt then it’s removed from the list and another company of similar size takes its place.
What are your investing tips or worries?
xx Miss Piggy
Cover illustration by Kelly Beeman.