Money for millennials: six popular investment options
Millennials have been locked out of the housing market, so are there other avenues of investment open to them? Certainly, the finance industry is working hard on creating products for younger people, but where to turn?
The plan for young Aussies has always been: work hard, save your money, buy a house, start a family, then worry about the rest later.
Now that the average 20 per cent deposit in Sydney and Melbourne sits at $156,000 and $115,200, respectively, part three (buy a home) in that classic four-point plan is changing.
Claire Mackay, a director at Quantum Financial, says that whatever investment choice is made by a millennial investor, the same questions emerge: Can you afford for the investment to go sour? Have you researched the product? And what’s your exit strategy?
With those three key provisos in mind, here are six highly popular investment options millennials (those born between 1982 and 1994) have.
American millennials love these. And while ETFs make up a small slice of the Australian investing pie, it’s an area that is growing by 50 per cent a year, according to Australian ETF manager BetaShares. (Roger Montgomery points out the failings of ETFs elsewhere in Wealth today).
ETFs are managed funds that can be bought and sold on the stockmarket like any share. They typically track an index or asset class, such as gold stocks, healthcare, technology, the Nasdaq, FTSE 100 and so on. Because they don’t require active management, that is, expert stock pickers, the cost is reduced. BetaShares charges a 0.4 per cent management fee, which works out to be $30 on a $10,000 portfolio, not including brokerage fees.
The benefits for younger investors are: ETFs remove the burden of stock picking and allow easy access to overseas markets.
Some people know what they want to invest in. What if you have no clue? Enter robots. Financial planning now includes programs that use detailed questionnaires to build a tailored portfolio, usually heavily slanted towards ETFs.
They’re often used in conjunction with regular financial advice and so young investors should be very clear about how much it costs.
One Australian provider of the service, Stockspot, says it charges between 0.53 per cent and 0.79 per cent per year, including brokerage, and balances over $50,000 have an annual $55 advice fee.
Buying a home might be out of reach for young Australians, but several businesses are now seeking to lower the hurdle for investing in the white-hot property market.
BrickX, for example, buys a property and then breaks it down into 10,000 “bricks”, with an initial cost of $100 per “brick”.
Investors receive monthly rental income in line with the number of bricks they own, and sell their shares, or “bricks”, to realise the capital gain.
Investors need to have an exit strategy here, say experts, for the secondary market (ie, the ability to sell your BrickX) might not be as reliable or fluid as they’d like.
Many seasoned real estate investors stick to the concept of never investing in a property they can’t drive past, so they can keep their finger on the pulse. Sydney and Melbourne may be out of reach for millennials, but real estate in the less frothy markets of Brisbane, Adelaide and Canberra have gained a still respectable 4.4 per cent, 3.1 per cent and 7.6 per cent, respectively, in the last year.
A 20 per cent deposit on the average house price in Adelaide is $84,000, and with negative gearing, some young investors might be tempted, but there are pitfalls.
“You’ve got to do your numbers and make sure it’s going to pull its weight. You can’t sell a portion of the investment, so it is a huge commitment,” Clair Mackay said.
If property prices fall, as they have in parts of mining and industrial regions, you’ll be stuck with a mortgage on a property that you might not be able to sell without realising a loss, or live in.
“Be smart about how much you’re committing to it, and always watch the exit strategy.”
Investing in superannuation while young is the wise advice that is constantly drowned out by sexier, faster options.
The nature of compound interest means, at 7 per cent for example, with no other deposit and before fees, $10,000 becomes $115,000 over 35 years. Bring the figure up to 8 per cent and the final total goes to $163,000.
A start-up called Spaceship, which has billionaire Atlassian co-founder Mike Cannon-Brookes as a financial backer, is targeting millennials with its mobile-only fund. The team (pictured) led by CEO Andrew Sellen, has already built up a waiting list for the fund. The platform seeks to help customers consolidate their accounts into one, and the portfolio will include global technology companies.
In a bid to boost innovation and develop a “start-up culture”, Prime Minister Malcolm Turnbull has unveiled a series of new tax incentives. Small businesses, with turnover under $2 million, can now instantly reclaim purchases up to $20,000, up from $1000.
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Source: Money for millennials: six popular investment options – The Australian