Investing on a budget: Micro-investing and using low-fee funds
This week's episode looks at how investors with tight budgets can still invest for their future.
Many Australians are struggling with the cost of living and focusing on present expenses, putting their future financial outcomes on the backburner.
Being able to continually invest over long time periods allows your savings to compound and grow. However, it is difficult to be able to afford the minimum investments for many investment products in the market.
There are some managed funds that require $500,000 initial investments. When you’re investing in listed equities (stocks and ETFs), there isn’t a minimum investment to do so, but brokerage is prohibitive for making small, additional investments. It wouldn’t make much sense for an investor to invest $50 in a share and pay a $5 brokerage fee. You’ve already lost 10% of your investment before the market has even moved.
Investing is important for many of us to create a better life for ourselves. Traditionally, investment products were prohibitive – these high minimum investments and the complexity of the products turned off many investors.
Now, there are products that allow investors to gain exposure to various asset classes including equities, with low or no additional investments. We explore some of the providers and options.
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Mark Lamonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances, or needs.
Shani Jayamanne: So today, we're going to speak about how to invest, which is what we normally do.
Lamonica: I think you need a little bit more there, Shani.
Jayamanne: But we're going to talk about it when you only have a minimal amount to spend.
Lamonica: Okay, well, that's good. And it's nice to have you back in the office, because you have been away a lot recently, all good things. You were in Melbourne recently, and you had a nice time. You can say anything, or you're just going to...
Jayamanne: No, I was waiting for you to finish your thought. But...
Lamonica: It wasn't much of a thought. It's just the fact that you were in Melbourne.
Jayamanne: I was. I was in Melbourne. I ate lots of great food, and I think that's a good segue into, we get a lot of emails saying that the podcast is very Sydney-focused and Sydney-centric.
Lamonica: And there's a reason, because...
Jayamanne: We're in Sydney.
Lamonica: We live in Sydney, and you talk about what you know.
Jayamanne: Yes. But maybe we can give some Melbourne recommendations.
Lamonica: Well, go ahead, because I wasn't there.
Jayamanne: Okay. You've been to Melbourne, though, and you're also a foodie. But I went to Tonka, which you've also been to. I thought that was awesome. It's like a modern Indian restaurant.
Lamonica: Yeah. No, I think that's a great place.
Jayamanne: I went to Kisumé, which was also great.
Lamonica: I've been there also. So you just copied all the places that I've been to.
Jayamanne: I think these are probably the most popular restaurants in Melbourne, so I don't think these are much of recommendations.
Lamonica: So you're not really uncovering places, as you just went down the top of the list.
Jayamanne: Yes. Yeah. And I went to Grill Americano, which we've both been to before. We went there for a conference. And steak's great.
Lamonica: We wanted to stay longer, but we had to fly back.
Jayamanne: Yes.
Lamonica: Well, there you go.
Jayamanne: Well, have you got recommendations?
Lamonica: I mean, I'm trying to think of, last time I was there, I went to Victor Churchill. So they're a butcher in Sydney. They've got a restaurant there. It's out a little bit. I forget the suburb. But...
Jayamanne: Okay. So really bad recommendations from us on Melbourne, but...
Lamonica: But at least we talked about a different city. Yeah. All right. So maybe we should get into the topic, since clearly we have nothing interesting to say.
Jayamanne: About Melbourne.
Lamonica: Yeah. So you said our topic is how to invest with a minimal amount. And I think obviously, we always talk about what is the first thing you need to do to invest? Well, you have to have some surplus cash. And we always talk about consistency. And so generally, this is what people are doing. You have a little bit of extra money. You're consistently investing about it. And we've talked about you a lot and part of your investment strategy. And this is really central to it, right?
Jayamanne: That's right, Mark. And many Australians are struggling with the cost of living and focusing on present expenses, putting their future financial outcomes on the back burner. But being able to continually invest over long time periods allows your savings to compound and grow. But it is difficult to be able to afford the minimum investments for many investment products that are in the market.
Lamonica: And there are some managed funds that have a $500,000 minimum for initial investment. So I would say that wipes out most people. And if you're invested in a listed equity, like an individual stock, or if you're investing in ETFs, there isn't a minimum. But because of brokerage, in practical terms, there is a minimum, right, that you don't want to spend $20 to buy $25 worth of a share. So yeah, that's really important. Obviously, I don't know, I guess use an easier example, $50, you pay a $5 transaction fee. So you're underwater 10% before you even get going.
Jayamanne: So let's look at an example. If you invest $1,000 with another $100 per week for 10 years, and you pay $5 brokerage, you pay over $3,600 in brokerage that could have been avoided by using products with no additional investment fees.
Lamonica: Yeah, exactly. And you've written an article on this. So we'll link that in the show notes. But basically, you create this diagram looking at the impact of brokerage over the long term. And it can be substantial.
Jayamanne: Yeah, definitely. And investing is important for many of us to create a better life for ourselves. Traditionally, investment products were prohibitive, and these high minimum investments in the complexity of products, they just turned a lot of investors off.
Lamonica: But there are new products. And those allow investors to get exposure to various asset classes like equities with low or no additional investment fees, which is obviously good. So these are, and we're going to go through some of the providers in the market that have lowered these barriers to entry. So it allows all investors to improve their financial future outcomes without having these big lump sums to invest.
Jayamanne: So today, we'll go through some of these products. And in no way is this an exhaustive list. It's just an example of a few products in the market and a very obvious disclaimer that it is an endorsement of the products and to consider them in light of your individual needs before you invest in them.
Lamonica: Okay, I think a good place to start is with managed funds because you love managed funds. So I think that's appropriate. So you've, and I think people that are unfamiliar with managed funds, you have a good article on them. We'll put that in the episode notes. It's kind of an explainer and a comparison to ETFs. And there are a lot of things that make managed funds attractive. I know everyone loves ETFs, but it's a good article. Give it a read. And it is important to obviously look at these different products to find out what's best for you. That's all we're looking for here.
Jayamanne: And so with the disclaimer out of the way, the first product is Vanguard Personal Investor. And the initial investment minimum is $200, which means you can open an account with $200. And the additional investment minimum is $1.
Lamonica: It's harder to get cheaper than that.
Jayamanne: That's it.
Lamonica: So what you can do on Vanguard's platform is you have access to 40 different Vanguard managed funds. And those can be multi-asset, which we've talked about on a previous episode. Or it can be just a fund focused on Aussie shares or international shares, property, or fixed interest.
Jayamanne: And Vanguard is well known for their ultra-low fees, especially with their passive investments.
Lamonica: And if you want to start that way, and then later on, you want to branch out, you're also able to invest in ETFs and direct shares through that same platform. And for those investments, there may be a cost if they are not Vanguard products.
Jayamanne: That's it. So the next product is Colonial First State. The initial investment minimum is $1,000 and the additional investment minimum is $1. These additional investment minimums of $1 are great for investors that have lumpy pay or financial responsibilities. If there are some weeks or months where you have a surplus and others where you don't, $1 additional investment minimum means that you are able to just put whatever spare cash you have at the end of your pay cycle into your investments.
Lamonica: Okay.So let's do an example that we always like to do when we look at the long term. So let's say you start with $1,000. You contribute $500 a month over 25 years. And let's say you get a 6.5% annual return. And obviously, we always need to think about inflation. So if we bake in 2.5% inflation, at the end, you would have $198,000 and because you like to be specific, $797. I would have rounded up, but I know how you like to be specific. If you had an extra $15 a week that you could put in there, then you would have $224,000. So it can be a big outcome, just small differences in how much you're saving. But let's get back to Colonial First State. So unlike Vanguard, this platform offers investors access to their managed funds as well as external managers funds. And as we said, initial investment of $1,000, then no minimum investment after that.
Jayamanne: With over 200 investment options, there are many funds to choose from for potential investors. And although there's no admin fee, it's important to look at all the fees charged for the investment options that you're considering. Investment options can have management costs or fees between 0.26% and 3.44%, which is huge. And there may also be performance fees or other ongoing costs that will impact your total return over the long term. The product disclosure statement, also called the PDS, is a useful document. It'll give you a bit of a breakdown of what the real costs are and what those fees might be for you. So if you're considering an investment option, just run through the PDS and have a look at the total fees that you'll be charged for those options.
Lamonica: All right, we've got one more managed fund platform. So that's Perpetual's WealthFocus Investment Advantage. So tell us about that, Shani.
Jayamanne: Okay, so Perpetual's WealthFocus platform, it offers investors access to 30 investment options with a minimum initial investment of $2,000 or $1,000 if you're establishing a savings plan. From there, there's no additional investment minimums. So again, you're able to invest whatever you have left from your budget.
Lamonica: And obviously, we always want to focus on fees. And many of the management fees on that platform sit above 1% a year, which is a lot. So that's an important consideration. The platform does have some tax advantages, though. And so obviously, fees are really important, but investors also really need to focus on tax. And basically, what you're able to do, not basically, you are able to switch investment options without triggering capital gains tax. So the platform operates on something called a one unit structure. And that's what allows you to move across those different options without CGT. So this may be useful during transitions through different life stages where your asset allocation mix needs to be adjusted. And there's also no capital gains on partial withdrawals until you exceed the cost base of your investment.
Jayamanne: All right. So we're going to move on to microinvesting apps now. And microinvesting means you're able to invest with as little as $20. There are a few microinvesting apps out there. And their purpose is to make investing more accessible for those with lower balances. They want a bit of a hands off approach.
Lamonica: And, it's hard to generalize about all microinvesting apps. So they all differ in their options, their fees, and the added features that they have. So one of the most important considerations with microinvesting is, of course, fees. So often the model that microinvesting companies use is that microinvesting company is the issuer of investments. So that means there's two different levels of fees. There'll be an investment fee. That's what you're paying for the actual investments and then there's another one, right, Shani?
Jayamanne: There is. And that's the administration or management fee. And this is the fee that you're paying to the microinvesting platform for the service of managing your investments and giving you the platform to invest. If there's a monthly or yearly flat fee involved in the investment, just make sure that the amount that you're investing makes sense for that flat fee that's involved. So, for example, if an investment has a $4.50 administration fee every month and you invest $20, it'll take just six months for that investment to come down to zero without capital appreciation.
Lamonica: Yeah. And your initial investment will, of course, be gone before you even gotten through a full year. And this is the tricky part about a lot of these. Those administration fees can be deducted from your bank account instead of from the investment amount. And this means that you may not notice the impact that that fee has on your investment, especially if you have a smaller balance. So, let's go through a couple of the popular ones, Shani.
Jayamanne: All right. So, the first is Raiz Invest, which offers a mix of ready-made and customizable portfolios. For ready-made portfolios, underlying assets are a mix of ETFs. So, for example, the moderately aggressive ready-made portfolio includes, and I'm going to go through some ticker symbols here, STW, IAA, IEU, IVV, IAG, RCB, and AAA. So, lots of tickers there.
Lamonica: It's like an eyesight test that you just went through.
Jayamanne: But the point is that it's just a premixed portfolio of ETFs.
Lamonica: And then, of course, as we were emphasizing before, let's look at costs. So, they charge a maintenance fee of at least $4.50 for balances under $20,000. No maintenance fee for balances over $20,000. Plus, of course, that underlying issuer fee, plus the investment management fee, which is $0.275% for balances over 20,000.
Jayamanne: I feel like they make this intentionally complicated.
Lamonica: Yes. I think a lot of people make things intentionally complicated, but yes.
Jayamanne: There's a feature that people do love with Raiz and that is Roundups. You're able to connect a bank account and any transaction that you make on that account, say you purchase a coffee for $4.60, it'll round up to $5 and you'll have $0.40 invested into your account.
Lamonica: Another thing it has, I think another thing that people, I hear people talking about a lot that they like is they have cashback services, a connection to cashback services. And that means if you shop online using those affiliate links, you'll get some sort of cashback. And that, of course, depends on the retailer that you're shopping at. And this is invested into your account automatically. All right. We've got another one for you. Take us through Pearler.
Jayamanne: All right. So, Pearler micro investing function allows you to invest in a number of investment options that are mainly mixes of Vanguard, Vanneck, eInvest and iShares ETFs. It also now allows direct share investments so you're able to have shares and premixed options in one place.
Lamonica: I'm sensing a pattern here. You always get to talk about the investments and then I have to talk about the fees. So, like you're getting people excited and then I bring the back.
Jayamanne: You're the downer.
Lamonica: Yeah, exactly. Which I think for people that know us is probably appropriate. Yeah. Okay. So, we'll go through the costs. So, any investment under $100 does not incur a fee. Any investment over $100 is $1.70 for one investment option and $2.30 for more than one. And that is per month. Pearler also has an offering of premixed options. So, all investments will be charged the underlying fees of the ETFs you're invested in. For example, their Aussie plus global investment option is a combination of two Vanguard ETFs, the very popular Vanguard Australian shares ETF with the ticker symbol VAS and Vanguard MISCI Index International Shares ETF VGS. So, you'll be charged Vanguard's fees on the ETF and Pearler's fees for holding that investment option.
Jayamanne: One more micro investing app for good measure and we've chosen Sharesies. Sharesies has a bit different offering. It offers a fractional share and ETF investing. So, instead of investing in a premixed portfolio, it allows you to invest in Australian and U.S. shares and Aussie ETFs.
Lamonica: Do you think with that name Sharesies, do you think you reach a certain age or a certain level?
Jayamanne: And you're like, I've got to pull my money out.
Lamonica: I just like can't, who do you invest with Sharesies? I don't know. I mean, I think they're going for the younger demographic, but they should have an alternative name for when you get old like me.
Jayamanne: Yeah. Like, you know, with the Harry Potter books, how like they have different covers for adults so they can read it on the train without getting embarrassed?
Lamonica: I didn't know that. Does the cover still say Harry Potter on it?
Jayamanne: They do.
Lamonica: So, you're still embarrassed in one way.
Jayamanne: But in very small writing, so.
Lamonica: Okay.Harry Potter is your favorite thing in the world. So, I'm not going to say anything negative about it. Although, you have not talked about Harry and Potter in a long time.
Jayamanne: I know.
Lamonica: It used to be every week you'd come in, you're like, I watched the Harry Potter movie last night, but maybe your interests are changing, just like some of Sharesies customers potentially. All right. Once again, I will talk about the fees. So, there's no investment or management fees, but you're actually charged based on trading. So, kind of like a broker. The fees are expensive. So, 1.9% transaction fee, plus 2% on linked bank transfers. You can remove these fees with their monthly plans. They range from $5 to $20, and it removes the bank transfer costs as well as trading fees up to a certain order amount. For example, $5 a month, you get $500 worth of orders. Those are covered. Sharesies also has roundups, and that's, of course, what you were talking about earlier, rounding up from your bank account.
Jayamanne: We have one more way that you can invest with a few dollars, and it's an often forgotten, already set up investment, and that is your super. A comfortable retirement is a goal that we all share. So, small contributions early can make a marked difference to retirement outcomes.
Lamonica: And the good thing about super, which hopefully most people know, but we've talked about, is that you can invest, of course, extra funds, but it also allows you to do so with a tax concession, with concessional contributions. There are two types of contributions, of course, as a reminder, or new information. There are two types of contributions that you can make into super, concessional. That means pre-tax, that can either be the employer contributions that go in, or if you salary sacrifice in there, or, of course, non-concessional. So, that is post-tax, and both of those have different limits, which you can take people through.
Jayamanne: All right. Why don't I take them through one, and then you can do the other. And I'll do the fun one, which is concessional contributions. They have an annual limit of $30,000. They come into your superannuation fund pre-tax, so they attract a 15% contributions tax upon entry. For example, you salary sacrifice $1,000 into your super, you'll pay $150 in tax, and it'll result in a net contribution of $850.
Lamonica: I'm going to dispute the fact that you got to do the fun one.
Jayamanne: Okay.
Lamonica: Do you think saving and investing is fun? You can say no, although we are on a podcast about investing.
Jayamanne: I wouldn't say fun. I'd say necessary.
Lamonica: Okay. Well, from a necessary standpoint, your limit's $30,000. These are people that are saving investing even more, because once you've hit that limit on concessional, you go into non-concessional, and there's an annual cap of $120,000, which is pretty good. So, those contributions have already been taxed at your marginal tax rate. So, they do not attract, or they do not cause any sort of tax when you actually make that contribution to go in. So, if you earn $100,000 a year, your marginal tax rate is 30%, and those are 2024 and 25 rates. Your effective tax rate is 23.8%. So, that is what you're actually paying, but you'd be paying that anyway, right? Because you are earning the money.
Jayamanne: However, if you have not met your contribution limit for your concessional contributions for the year, you are able to vary your contribution. So, this is changing your one, your fun one to my fun one.
Lamonica: There we go.
Jayamanne: So, it does mean you're changing it from non-concessional to concessional. It means you receive a tax deduction for this. And as you can see from the example, this is particularly attractive to those on higher incomes, but it's important to keep in mind the concessional limit.
Lamonica: Okay. So, how do you do this? Well, you need to submit a S290 form or a notice of intent to vary or claim a deduction for personal contributions. So, traditionally, this form was used by those that were self-employed as they had no traditional payroll to submit super guarantee or salary sacrifice contributions for their super. The purpose of this form is to turn post tax contributions to pre-tax or concessional contributions.
Jayamanne: Do you think that listeners would agree that this is fun?
Lamonica: I think at this point in the podcast, they're like, listening to this is not fun, going through these forms and everything else, but it is important.
Jayamanne: Yes, necessary.
Lamonica: Yes, there we go.
Jayamanne: The industry has come a long way into making investing more accessible for individual investors with smaller balances. And I think the main lesson here, as it is with all other scenarios, is understand the product and the investment that you are investing in and how it connects to what you're trying to achieve. And that's regardless of the amount that you can invest because it's important to define your goals around your circumstances.
Lamonica: And we have so many resources around all of this on Morningstar.com.au. So, please go there. So, I don't have to sit in meetings where people say, why aren't more people going to the website?
Jayamanne: To the website.
Lamonica: But I think they're valuable resources, but I wrote some of them to be completely fair. I'm a little bit biased here. But we do have a lot around defining goals, which we think is that foundational step that people should take before going into this. So, that's it, Shani. We got some obvious restaurant recommendations. We got to listen to me talk about fees and then talk about ATO forms. What else could you want?
Jayamanne: Nothing.
Lamonica: Yeah, exactly. Well, thank you very much for listening. Really appreciate it. Questions or comments, you can send to my email address, which is in the show notes. And we would love a podcast rating or a comment that's nice.
