Shares can make sense as an investment opportunity

A GRANDMOTHER’S gift can be honoured by using her money to begin learning about investing in the share market, says SCOTT PAPE.

LUCY SAYS: I have always been influenced financially by my grandmother, Evelyn, who would put dollar coins in separate containers — one for power, one for phone, etc. I am now 35 and I earn $60,000. I own a three-bedroom unit worth $650,000 ($75,000 mortgage) and an investment property worth $500,000 ($248,000 mortgage). I have $30,000 in super (shares scare me!) and $20,000 in an emergency fund. Evelyn has left me $10,000. How do I honour my biggest influencer with her gift?

BAREFOOT REPLIES: At your age, and with wealth-building habits burned into your brain, you’re basically home and hosed. Still, you’re very exposed to a downturn in property prices. I’d like to see you diversify and take a stake in some of the world’s best businesses. So, I’d honour your grandmother by using her money to begin learning about investing in the share market. Have a look at an international Exchange Traded Fund (ETF) like I00. ASX, which in one simple trade invests in the hundred biggest businesses in the world: Facebook, Apple, Toyota, Nestlé and lots more. Good luck!

EMPTY NEST

PENNY SAYS: I am 49 and a divorcee with 25 and 23-year-old kids who still need financial help. I earn $48,000 and have no debt. I have $100,000 in a term deposit and $90,000 in super. I read your articles all the time but I don’t feel like I understand the stock market. How should I be growing my wealth? I am thinking of an investment property but the whole idea is making me very anxious.

BAREFOOT REPLIES: Today is your lucky day — I’ve got a plan that’s going to help you, and your kids. First, let’s deal with your kids. Cut the financial umbilical cord. Kick them out (unless, of course, they are disabled and dependent). Sit down with them and explain that after 25 years, it’s time they stood on their own feet. You’re a divorcee, on your own, and you’ve done a bloody good job. This is your time. Now I don’t know whether you’re a homeowner, or how expensive it is where you live. But if you don’t own a home, you could use the $90,000 as a deposit on a small one-bedroom unit (another handy hint for your kids). With the kids out of your hair, here’s what I want you to do. If you keep turning up to work ’til your 65th birthday, you’ll have $276,000 in superannuation. However, if you chip in an additional $400 a month into your super (called “salary sacrifice” — talk to your boss), your take-home pay will be cut to $3000 a month but you’ll increase your end balance by $125,000 — and end up retiring with $400,000.

MILKING IT

TODD SAYS: What do you think about the listed milk provider A2M? Is it possible it could be the next Bellamy’s? The China market for our milk is out of control at the moment, with companies simply not able to produce enough to meet demand. They can’t even satisfy the Aussie market (hence the Woolies Facebook drama over a trolley full of formula while mums can’t get it). A2M has delved into the formula market, which even Gina Rinehart wants a piece of, I hear. I would like to know your thoughts because it is a cheap share.

BAREFOOT REPLIES: You sound like my wife does when she’s buying clothes — you’re not really asking my opinion, so much as justifying your decision. For reasons I can’t understand, baby formula is going through a speculative bubble. As you mention, the poster child for the baby formula boom is Bellamy’s, a tiny little Tassie business that makes (or more accurately markets) baby formula. Its share price is up 657 per cent this year. Of course, anyone getting into the baby game knows it’s a long-term investment: Bellamy’s investors aren’t buying for the “earnings”. On current prices, they’d have to wait 130 years to break even. Then again, I imagine most of the punters piling into Bellamy’s are still wearing their investment nappies. Like a teething baby, speculators have a short attention span, and are now looking for the next “sure thing” to drool over. Enter A2Milk, a struggling New Zealand udder-operation which has been richly rewarded from jumping on the baby bandwagon: its share price is up 92 per cent this year. Is A2Milk cheap? Well, it depends on your definition of cheap. How much would you pay for a business that doesn’t make a profit? The bottom line is that, while the stock could go higher, you’d better watch out for the reflux. Goo-Goo-Ga-Gaa!

 

ALARM BELLS

MICHAEL ASKS: My wife and I have been burned by the dream of my own SMSF. I went with a group who encouraged us to borrow and invest in their investment products via a non-recourse loan. Our $100,000 exposure cost us $16,000 in upfront costs. Over the three-year term, partial coupons were paid each year and the rest at maturity. It sounded great until three years later. All I have left is $12,000! Surely this should be illegal? How do you stop this?

BAREFOOT REPLIES: Here are the alarm bells that would have gone off in my head: First, $60,000 isn’t enough to open an SMSF. A basic Google search would have told you that. Second, paying $16,000 (which is 16 per cent in your case) in upfront costs is ridiculous. Third, anyone who didn’t hear the first two alarm bells would have absolutely no idea what “partial coupons paid each year” actually means. The bottom line is that at some level you must have understood you were taking on more risk, rather than leaving your money with a garden-variety super fund. You took a punt and lost. Stupid isn’t illegal.

Barefootinvestor.com

Originally published as Shares can make sense as an investment opportunity