Author: Navarre Trousselot

The times they are a changin’. Our need to build wealth is not — but the way we do it is. Here’s some ideas on how (and why) to begin investing now.

Maybe you’re 19 years old and have yet to pop your investing cherry.

Maybe you’re 29 years old and the penny has finally dropped that grinding out a 9-5 job for the next 30 years will bring you more misery than financial security.

Maybe you’re 39 years old and you need to recover having just lost a substantial chunk of capital in the markets.

Whatever the scenario, we’re going to take a look at the investing and personal finance landscape as it stands in mid 2020 and explore a couple of approaches for building wealth from at, or near, zero.

There are some aspects to investing that haven’t changed in hundreds of years.

But there are other parts of the wealth building process that are changing faster than ever before.

If you’re starting out building wealth in the financial markets today, you face a significantly different set of challenges and opportunities than you would have 50, 20 or even just five years ago.

In 2010 index funds were all the rage.

Today, just 10 years on, cryptocurrencies, private equity, micro investing and fintech are driving innovation and disruption to the point where, to many, index funds seem boring.

Starting from scratch today is a different beast on that basis alone — leaving the major economic fallout from COVID-19 aside.

So let’s start with the basics.

The Best Time To Begin Is Always Now

Whenever you begin investing, and at whatever age, your most powerful ally (or adversary) is time.

Anything you do in life requires time.

In investing, how you spend your time is particularly important.

You’ve probably heard the statement that time in the market is more powerful than timing the market.

This refers to the generally accepted idea that on a long enough timeline, stock prices go up.

In a two year period, the market might fall 50%.

But over a 20 year period, the market will probably rise 150% to 200%.

If you’re wondering whether to begin your investing journey now, the answer is yes based on that idea.

Check out this example from The Street to see why.

Take two 25-year olds.

The first commits to investing $5,000 a year for 11 years.

Total starting capital: $55,000.

The second waits until they are 35 to begin investing $5,000 a year and keeps doing so until age 60.

Let’s assume an annualized rate of return of 8% on their invested wealth.

The one who started at 25 invests $55,000.

The other invests $130,000.

Looking at that, you’d assume the second investor would gain the most, having invested more than double what the first did, right?

Well, check this out.

At 8% a year, the first investor has grown their portfolio to $615,000.

It’s taken 35 years to generate $560,000 in profits (forgetting brokerage fees and taxation for the purposes of this example).

The second investor, on the other hand, who started 10 years later but invested over 26 years instead of 11, has grown their portfolio to $430,000 from a total investment of $130,000.

Despite investing more money, they’ve made just $300,000 in profit — more than a quarter of a million dollars less than the one who started at age 25.

That, in a nutshell, is the supreme power of time in building wealth.

That’s why we say there’s no better time to start than now (providing your personal financial situation allows it, of course — this is not personalized financial advice!).

The way that time works for you when you start right away is that your returns compound.

If you leave your money and the returns it generates in the market, then you start making returns on top of those returns.

The more time you allow for this process — which Einstein called the eighth wonder of the world — the more you can benefit from it.

And on the topic of time…

Starting Early Allows You To Be
More Aggressive In Your Investing

If you are in your early 20s, for instance, you have about 33% more time — in theory —  before the notional retirement age of 60 to go about building wealth.

That’s 33% more time you can use to experiment, learn and refine your investing style.

It’s also extra time you can use to recover from any losses you might incur from investing in higher risk assets — like small caps, speculative tech stocks, cryptos and options.

Higher-than-average risk assets can sometimes bring higher-than-average returns.

If you get up and running early in life, you might find you can make some big returns by tolerating the higher risk.

But even if you’re only getting started in your 30s, you might want to allocate a small amount of capital to trying to win big in cryptos or options.

Generally, though, you probably won’t want to take on as much risk, as you’ll have less time — in theory — to recover from any losses your capital suffers.

Whenever you’re starting though, you should:

Cultivate Financial Literacy And Discipline

The saying ‘knowledge is power’ is a cliché. But it is so for a reason.

Because in many senses, it’s true.

In investing, it is especially true.  

In order to take $10,000, or $50,000, or $150,000 and multiply it 10 or 20 or 50 times through investing, you’re going to need to obtain and interpret a lot of knowledge.

Knowledge about the markets, the world, financial technology, business — basically everything.

Becoming financially literate will elevate your knowledge about the world and consequently your ability to navigate your wealth through the markets.

It’s a constant process. Read widely, expose yourself to different ideas about making money the constantly changing landscapes of both personal finance and the wider financial world.

Keep An Open Mind
And Let Data Guide You

Beginning your investing journey in 2020 is in some ways no different from if you were beginning in the 1980s.

But in other ways, it’s markedly different.

Today, you have access to more information than ever before.

If you have an internet connection, you have the ability to find out almost anything you like about a market, stock, anything, really.

You also have access to assets that didn’t exist even 15 years ago — cryptocurrencies — and ways of getting into the market that are only possible because of technology.

Micro investing is a prime example of that.

The apps and platforms that allow you to invest pocket change into funds and stocks take advantage of many strands of modern connectivity and financial technology to make investing more accessible and easy to understand.

You may have heard this trend called the ‘democratization of investing’.

This trend is the latest evolution in the history of wealth building.

Combined with the sheer amount of information available, the current state of the investing world means you have more power and knowledge than ever with which to begin your own wealth building journey.

The bottom line is, if you’re starting that journey in 2020, you should take advantage of the centuries of knowledge and research available to you — and the latest technology to help you implement that knowledge in your own investing.

To sum up then, if you’re just starting your wealth building journey…

Start as soon as possible and take advantage of every tool and piece of knowledge you can.

And now, a shameless plug for the platform we’ve designed to help you do just that.

This interplay between knowledge and technology is central to our portfolio tracking platform, Navexa.

We’ve built it to help you empower yourself and inform your decisions with near real-time data and analytical tools that, in decades past, would only have been available to those in the financial industry.

You can sign up free and get access to advances investing analytics and reporting tools, beautiful customisable charts and benchmarking.

Begin your Navexa trial here.

How do you work out which stocks represent sensible long-term investments? We dive into the world of valuing potential investments on the stock market.

With more than 2,200 listings on the ASX, how do you choose a single stock to invest in?

For many of us — especially those of us who hunt for value over the long term — the process begins with valuing a company whose shares trade on the stock market.

It won’t come as a surprise that there are many ways to go about valuing a company.

We all approach investing and building wealth in our own way.

Just as some investors look for high potential growth stocks that could explode hundreds of percent higher in a short time…

And others prefer to buy and hold large, relatively stable stocks for a long time…

There’s a variety of options available to you as you evaluate the value of a potential investment.

Here, we explain a few of the main ones.

First, though…

What Does It Mean To Value A
Stock — And Why Should You Do It?

When you buy shares, you own a fraction of the company whose stock you acquire.

This means that before you buy shares in it, it makes sense that you understand the business you’re buying into.

This, in turn, means you need to delve into the business’s finances.

The phrase ‘due diligence’ refers to this process.

If you don’t know what you’re buying into, then you’re not investing.

You’re gambling.

Your due diligence — the necessary research, in other words — is what differentiates a bet from an investment (which is still a risk, of course, but a calculated one).

Determining a business’s financial health allows you to understand whether or not its share price accurately reflects the company’s value.

The stock market is seldom a perfect reflection of the value of the companies trading shares on it.

After all, everyone in the market is looking for opportunities to make money by speculating on the future.

This means that a company’s shares can easily trade below or above the ‘true’ value of the business they represent.

This is where valuing a stock gets interesting.

Popular Ways Of Valuing A Stock

The simplest measure investors use when trying to get a handle on a stock’s value is the price to earnings ratio, or P/E ratio.

The P/E ratio is the current share price divided by what the company earned for every share over the past year.

Generally speaking, the higher the P/E ratio, the more overvalued you might say a company’s shares are.

A lower P/E, on the other hand, might indicate the market undervalues the shares relative to the overall health of the business.

Other common ways to approach valuation include:

Cash flow: While a stock might not be getting much love from investors and trading cheap, you might fight when you dig into their financials that the business has a strong cash flow (that they make a good return on their spending, in other words). This could be an indicator that the share price will rise higher as the market notices the business making more money in the future.

Debt ratio: Work out how much money the businesses owes to others. Low debt, generally speaking, is a positive sign that a company is healthy and its stock price may rise in the future.

Assets/liabilities: Another helpful ratio to deploy in valuation research is assets/liabilities. This is exactly what is sounds like. Divide the value of the company’s assets by the value of its liabilities. The higher the ratio, the better.

Using Navexa’s Built-In Value Calculator

There are, as they say, many ways to skin a cat.

When it comes to valuing a stock, there’s a huge array of ratios, calculations and methods available to help you get an idea of where a company’s shares are trading relative to its ‘true’ value.

It’s up to you to find the method that best fits your investing style and wealth building goals.

But to make life a little easier for our users when they are trying to value a stock, we’ve built a simple value calculator into our portfolio tracker.

Our calculator uses the discounted cash flow method.

This method determines the value of an investment based on future cash flow.

It’s based partly on hard, current numbers, and partly on predicted or forecast future numbers.

This method is similar to what Warren Buffett uses to value a stock.

If the discounted cash flow works out to be higher than the current cost of the investment, this is an indication that the price could rise in the future.

It’s not guaranteed or 100% accurate. No method that estimates future events can be.

And it is just one of the ways to go about determining value when evaluating a stock.

We recommend you try different methods until you find one that suits you best.

Try ours here!

What is dividend reinvestment? How can you harness it in building your wealth? We explain this powerful type of income investing.

 You have two options.

Option A allows you bank a capital gain of $400,000 on an investment over 20 years.

Option B allows you to bank $2.4 million on the same investment over the same time period.

Which do you choose?

As far as no brainers go, this one shouldn’t require a nanosecond to decide.

So how is it that the same investment could produce such drastically different gains over the same time period?

The answer is a simple — but super powerful — investing tool called a dividend reinvestment plan.

Dividend reinvestment is exactly what it sounds like: The reinvesting of income earned from a dividend paying stock.

How Does Dividend
Reinvestment Work?  

Compound interest is the eighth wonder of the world.

— Albert Einstein

Einstein was once asked — allegedly — what he thought was the eighth wonder of the world.

His response: ‘Compound interest’.

‘He who understands it’, Einstein said, ‘earns it. He who doesn’t, pays it’.

A dividend reinvestment plan allows investors to tap into the deep power of compound interest.

Here’s how it works.

Companies that pay a dividend to shareholders can offer a dividend reinvestment option to those investors.

This means that instead of collecting cash then your stock pays a dividend, you instead reinvest that cash into more shares.

In other words, rather than accumulating cash in your trading account, you accumulate more shares.

That means your dividends compound in the form of capital.

The more you reinvest, the more shares you accumulate.

And the more shares you accumulate, the larger (in theory) your dividend grows over time.

As Einstein says, compounding can work for or against you.

If you have a loan you’re paying interest on, generally speaking, the longer you take to repay that loan, the more interest you’ll pay on it.

That means you’ll lose more money the longer you keep the debt.

But dividend reinvestment plans allow you to flip that equation and make compounding your ally.

And as with debt, the longer you keep it, the more the interest will accumulate.

Compounding is why…

Dividend Reinvestment Is A
Powerful Long-Term Investing Tool 

A large income is the best recipe for happiness.

— Jane Austen

Take a look at this chart.

This shows you how a $10,000 investment in the S&P 500 index could have grown from December 1960 to December 2018.

As you can see, by using the dividend reinvestment policy, you would have accumulated a huge capital gain compared with collecting cash dividends for the duration of the investment.

This is of course a very long-term example.

But it shows you the potentially major long-term power dividend reinvesting represents to investors who are prepared to buy and hold income-paying stocks for a long time.

The biggest upside of dividend reinvesting is obviously the potentially generous lump sum you could access if you sell out of the stock after a long enough period.

The biggest downside is of course that you need to forgo regular income from cash dividends in order to tap into the power of compounding like this.

So, if you are considering using a dividend reinvestment policy with your dividend stocks, you should know this:

Navexa Automatically Tracks Your
Australian Dividend Reinvestment

If you’re a Navexa user, you don’t need to worry about manually tracking your dividend reinvestments.

That can quickly get messy and confusing, as stock prices and dividend amounts fluctuate over time.

The good news is that your Navexa account allows you to automatically track your reinvested dividends.

Simply toggle the dividend reinvestment option to ‘on’ when you view that holding.

Navexa will then record each dividend as reinvested and reflect this in your capital gains.

You can track how many new shares each dividend payment amounts to and chart the accumulation and compounding over time.

All with one click.

We hope this have given you an insight into the power of compounding as it applies to dividend reinvestment.

And if you’re not already a Navexa user…

Start tracking your investment income smarter today.

Why earning dividend income from your shares — and tracking it effectively — is vital to portfolio performance reporting.

If I told you that you could make back your entire initial investment in a stock without enjoying a single dollar of capital gains…

Would you want to know how that’s possible?

I know I would.

The fact is this is entirely possible.

I’m actually well on my way to this being a reality with one of my investments right now.

How does this work?

Dividend income.

Dividends are, in many ways, the unsung heroes of long-term wealth building.

Not only do dividend-paying stocks allow you to earn money simply for owning shares…

They allow you to harness the power of compounding (something Einstein referred to as the eighth wonder of the world) to take a modest investment and potentially turn it into a fortune decades down the track.

Understanding the power of dividend yield is vital to a successful long-term investment strategy.

Properly tracking the income you earn from dividends is vital to:

1. Understanding the true performance of your entire investment portfolio.
   
2. Ensuring you crush your annual investment tax returns with full confidence and minimal stress.

In this post, we’re talking dividends and investment income.

If you want to grasp their true power — and learn a smart way to save time tracking and reporting on your dividend income — then read on.

Dividend Income:
Getting Paid To Own Stocks  

The only thing that gives me pleasure? It’s to see my dividends coming in.

— John D. Rockefeller

There are some inspiring stories out there of big time investors who’ve built huge fortunes by hanging on to stocks and living purely off the dividends, without ever having to sell to make money.

Let me start with my own experience.

A few years ago, I bought shares in NAB.

I bought the stock with the intention of holding it for a long time.

My research showed it was going to go up in value over the long term — and that the current market price was fair value.

But more importantly, it told me NAB would pay me cash dividends to hold these shares.

In the four years I’ve owned the stock, I’ve earned enough dividend income from it that I’ve been repaid 40% of my initial investment thanks to the company’s profits.

All I’ve had to do is sit tight and not sell. Which was always my plan.

So $100,000 worth of shares would have made me $40,000.

This is the essence of dividend investing.

It’s the closest thing to free money you can get, short of winning lotto.

Put enough time into it, and dividend investing can help you build substantial streams of extra income for relatively little effort.

Bear in mind this leaves capital gains aside.

In a perfect world, you would buy $100,000 worth of Stock X, collect $40,000 in income over the course of a few years and enjoy a capital gain on top of that when you do eventually sell your shares.

You can see how, deployed across a large and diversified portfolio, over a long time period, dividend investing can be very powerful.

How And Why To Track
Your Dividend Income

Time is the friend of the wonderful company.

— John D. Rockefeller

There’s two reasons why you should track your dividend income.

First, you’ll want to know how much your investments are earning for you — and how much time it could take for your stocks to eventually ‘pay for themselves’.

Second — and this is important — you must report your dividend income in your tax return.

The tax man will generally tax your dividend income in the same way as personal income.

For those using spreadsheets to track multiple stocks that pay dividends in various ways (electronically, via brokers, using cheques in the mail and so on), this can quickly become a burden.

You may find yourself rummaging in drawers, trawling through bank statements and trying to get access to registries in order to properly collate all the information you need to satisfy the taxman.

Headache.

This is a big reason we’ve built a dividend income reporting tool into Navexa.

You can use it to view income generated over a given time period…

To track dates and amounts of individual dividend payments…

To add notes and statements for those payments, and to generate a report you can hand to your accountant to succinctly show exactly what you’ve made from your stocks in the past financial year:

Keep Your Dividend Income
Flowing Without Stressing
About The Details

Making money in the stock market divides into two distinct things:

Buying shares that you sell for a higher price later.

And earning income from shares for the duration of holding them.

Income is a huge part of investing.

As a private investor, one of my dividend stocks has already paid me back nearly half my initial investment.

Deploying capital into dividend-paying stocks, with enough time, can make investors substantial amounts of money.

As such, income becomes an important part of your performance calculations for your overall portfolio.

But it also becomes a burden at tax time.

The solution is simple — use a portfolio tracker to record, analyse and report on ever dollar of investment income your portfolio generates.

MORE: Learn about the Dividend Reinvestment Plan.

Part III in our series on self-directed investing.

Welcome to the third and final installment of our series on self-directed investing.

In Taking Ownership Of Your Investments, we covered what it means to take charge of your investment portfolio, as opposed to trusting your financial future to a money manager.

In Choosing A Strategy & Assets For Your Portfolio, we looked at the main types of investment assets and portfolio management strategies at work in the markets today.

In this post, we’re showing you how building wealth today is more dependent than ever before on technology and data.

You’ll see why the old ways of analyzing your portfolio are now obsolete, and why we’re about to witness an explosion in software that helps investors harness the unprecedented amounts of financial data.

If you’ve not read parts one and two in this series, we encourage you to do so before reading this.

And if you’re new to Navexa, you should check out our homepage for a quick overview of the online portfolio tracker offer (and why!).

How Big Data Has
Changed Investing  

“There’s no avoiding the realities of the Information Age. Organisations that continue to use 20^th Century tools in today’s complex environment do so at their own peril.”

— Retired United States Army General Stanley McChrystal

This is the Age of Information.

We’re living in a time when we’re more connected to the world through technology than ever before.

We’re also generating and consuming more data than ever before.

Retail, advertising, medicine — you’ll be hard pressed to find a market or industry that hasn’t been disrupted or transformed by what we often refer to as ‘big data’.

Funnily enough, however, the world of finance has been a little slower than other sectors in its adoption of — and disruption by — technology and data.

Maybe that’s because the financial markets and banking systems are massive and deeply dependent on government for regulation and oversight.

But, things are changing for investors now. Fast.

According to Forbes:

‘Making money is no longer viewed simply as the result of the insightful decision making of market wizards. Rather, returns in markets are seen to follow from rigorous research. Investing and trading are becoming increasingly evidence-based.’

How, exactly, is big data transforming investing?

The biggest factor in the shift toward data-driven investing is that now there is nowhere to hide.

There’s so much information available about the historical and relative performance of stocks, sectors and markets…

That there is no longer any excuse for making decisions based on ‘a gut feeling’ or an opinion.

Everything you need to know about a trade or trend is available to you in the form of digital information.

Consider that more than $4.6 billion changes hands on the ASX alone each day.

That’s more than a trillion dollars a year.

Every single transaction is now a datapoint in a huge, ever-growing big picture which you can look at to determine how best to position your own investments.

If, that is, you have the tools to do so…

(And you’re not clinging on to the old spreadsheet, thinking the old ways of tracking your stocks will be good enough in the Age of Information.)

How To Harness Data In
Managing Your Portfolio

“To beat the market, you’ll have to invest serious
bucks to dig up information no one else has yet.”

— American Economist Merton Miller

We like this quote from Merton Miller.

Knowledge, as they say, is power.

When you’re investing, the more information you can gather, the more knowledge you have.

And the more knowledge you have, the better you can understand a situation and take action.

The only thing Merton (who won the Nobel Prize in Economic Sciences in 1990) got wrong with this quote is that you have to invest serious bucks to dig up the information you need to beat the market.

Maybe 10 years ago, this was true.

But today, with a portfolio tracker like Navexa, you don’t have to invest serious bucks.

For zero cost (or for a meagre monthly payment, depending on your requirements), you can now access analytics tools that give you massive insight into how the markets — and your own portfolio — is behaving.

Here’s an example.

Portfolio Contributions

This is just one tool we’ve created to help our users see at a glance one vital thing about their portfolio:

Which stocks are pushing your total returns higher, and which are dragging the portfolio down?

Twenty years ago working this out would have been a painstaking, manual process open to human error.

Today, with our service, you can literally see in one click how each holding in your portfolio is contributing to your overall performance.

This is one of many analytics tools we’ve built to help our users understand not only how their investments are performing, but how their entire portfolio compares to the wider market.

Use Navexa’s Online Portfolio Tracker To Make Smarter Decisions

Investing in the Age of Information, where big data makes it easier than ever to clearly see what your money is doing in the market, is arguably the best time ever to be building wealth.

The trends we’re seeing (and which we’re able to see because of data) show that more of us are ditching advisors and money managers to take ownership of our portfolios.

We have a huge number of assets and tactics to choose from on our wealth building journeys.

And by harnessing the power of data through modern portfolio tracking tools like Navexa, we can see more clearly the path to our financial future.

We hope this series on self-directed investing has been helpful to you!

Ready to start tracking your stocks smarter? Go here.