Australian wages are growing at a miserly 1.9%. This rate has been declining since 2010 as it continues trending further downward. Combine this with property prices growing at 4 times that rate and the opportunity for young Australians to enter the property market or get ahead financially is looking bleak.
So what options are there for young Australians to invest and grow their wealth? Despite their penchant for spending and smashed avocado, a recent report by Australian Securities Exchange Ltd, shows that between 2012-2017, the number of young people investing in shares has drastically increased.
The report states that young investors, are trying to achieve three main financial goals when choosing to invest:
- Accumulating wealth
- Saving for a home deposit
- Saving for travel
Leveraged Equities Limited believes this trend could be attributed to the younger generations views; that they are being squeezed out of the property market. According to Leveraged Equities Ltd, because shares have a lower initial outlay compared to property, when it comes to wealth accumulation, shares have become the preferred method. Moreover, the lowering of interest rates has meant saving accounts are less profitable and as such gaining a margin loan to invest in shares is more appealing.
Investing in Property vs. Investing in Shares
When investing in property people will usually borrow 80% of the money for an investment. The growth rate in the asset is around 11%pa. Property owners can then use the money generated through renting to cover the interest expense. The interest may potentially be tax deductible.
When investing in shares with a margin loan, a similar approach is taken. Investors will collect dividends to cover the interest expense. The interest may also be tax deductible because the loan is being used for investment purposes. As shown in the graph below the long-term growth rate of shares is similar to property, at 11.3%pa.
With the approach taken to investing in property and investing in shares being similar and with similar outcomes it’s no wonder equity investment is on the rise.
Investing in shares has a relatively lower barrier to entry, investors can start at a low amount (as little as $500) and then invest regularly by making both a personal contribution each month and matching that with a margin loan. This will allow a person to average into the market and as such is attractive to young investors.
With lower transaction costs and greater liquidity, investing in shares is stacking up as a sound way forward for young investors.
Financial Advice for Young Investors
In the last year, 58% of the ‘new generation’ have used either a full-service broker or a financial planner, this guidance allows them to have a tailor-made plan to reach their personal goals.
The ASX report highlighted the top 3 reasons for using financial advice:
- Obtain advice tailored to their personal circumstances
- Get investment ideas
- Help them diversify their portfolios and minimise risk
United Global Capital specialise in designing financial strategies and finding investment opportunities that maximise returns whilst minimising risk for Australians in every phase of life. Contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email [email protected] to learn more.
The information contained in this article is General in nature and has been prepared without taking into account your objectives, financial situation and needs. When assessing any investment you should also consider that past performance is not a reliable indicator of future performance.