Morningstar Guide to Investing for Women: Part ll

Part 2: Putting your money to work

Part 1 of the Morningstar guide to investing for women armed you with the foundational rationale to take the leap into investing, provided guidance on how to close the retirement gap and gave some guidance on how to make sure financial advice you receive is fit for purpose. For those of you who haven’t invested yet it is time to make your money work harder for you. For those of you who already invest it is never a bad time to brush up on the basics.

How do you know you’re in a position to invest?

1. You have no Personal Debt/Liabilities

In almost all circumstances, your priority should be debt reduction if you are in non-investment or government loan related debt.

Credit cards and personal loans are the most common culprits of ‘bad’ debt. It’s important to understand that these products usually charge extremely high interest rates. These loans or credit cards can often snowball with the accumulated interest, so it’s important to pay off your liabilities as soon as possible before even considering investing. The bottom line is that it is unlikely that you will be able to earn an investment return higher than the interest rate. In that scenario you will become poorer by investing.

2. You have an Emergency Fund

An emergency fund is a pool of savings to cover unexpected expenses. Emergency funds vary in size. Most guidance suggests 3-6 months of salary, but I prefer to follow a guideline of 3-6 months of expenses instead—this is a personal choice and it’s ultimately what works for you. The purpose of this fund is to provide an easily accessible source of funds when you need it. It’s important that you are prepared for the unexpected—focus on building this emergency fund before considering investing.

3. Create a source of funds for investing through budgeting

Budgeting is a key enabler of investing. Understanding your surplus (how much you’ll have left over after your expenses) is the only way that you are able to comfortably invest without getting into situations where you have over-extended yourself. There are suggestions of tools and resources at the end of this guide to help with the budgeting process.

How do you construct your portfolio?

There are four activities that input into building your portfolio:

Define your goals
Calculate required rate of return
Select asset allocation target
Select investments

Part One: Defining Your Goals

We spoke a little about defining goals in Part 1 of this guide.

Defining goals allows you to plan your investment objectives around your needs, and not just maximising your returns. What this can do in some circumstances is reduce the level of risk that you take, especially when it is not required to reach your end goal.

Planning your goals can seem daunting, especially when it’s far into the future or seems unattainable. Avoiding this process means that you are deferring the ability to make an impact on your outcomes—as we discussed in Part 1, time is a significant determining factor on your outcomes.

The questions to consider when planning your goals are:

What are my objectives in life?
How much will it cost to fund these objectives? (remember inflation—Morningstar estimates 2.6 per cent each year as the cost of living increases)
When do I need the money to pay for them?
How much have I saved already to fund these objectives?

Part Two: Calculate Required Rate of Return

To explore this process in depth, you can refer to our Portfolio Construction Guide.

There are a few steps involved in calculating your required rate of return,

1. Determine your net worth

Determine your net worth by completing the net worth worksheet.

This will give you structure to look at your assets and liabilities to work out your net worth.

2. Create a personal cash flow statement

You can find a Personal Cash Flow Statement here to complete, so you are able to determine how your monthly earnings and spending are tracking.

This personal cash flow statement will provide you with a point-in-time snapshot of what income comes into your house, and how you are spending and saving.

3. Document your financial goals

The next step of collecting the information you need to calculate your required rate of return is documenting your financial goals. What documenting means is to define and estimate the cost of each goal. This should be relatively straightforward for your short and intermediate term goals.

We’ve provided a goal planning worksheet to structure this process for you.

4. Assess where you are

Completing these worksheets should add some transparency to your financial situation. The output of this worksheet gives us a better understanding of how you are tracking against your goals, the level of investment risk you need to take or any lifestyle changes you may need to make.

The calculation for the required rate of return is a variation of the time value of money formula. This is one of the most important concepts in investing as it answers a fundamental question—how much will an investment be worth in the future (given a certain rate of return)?

The required rate of return calculator can assist in understanding what you need to earn to meet your goals.

Part Three: Select an asset allocation target

To assist with setting an asset allocation target, Morningstar has created five different defensive/growth asset class combinations related to five different levels of risk: Conservative, Cautious, Balanced, Growth and Aggressive.

Your allocation to different asset classes can have a significant impact on the overall returns generated by a portfolio. The other driver is performance—there is no guarantee that asset classes will have consistent or predictable returns. Above, you can see how the split of growth and defensive assets impacts the minimum investment period for the profile. Morningstar bases the required rate of return on a CPI+ objective. What this means is that these portfolios look to beat inflation (so you maintain your purchasing power), and then grow your portfolio at a required rate of return needed.

Morningstar is a leading independent provider of investment research, providing research on a range of assets including equities, funds and ETFs. This research can help with the decision-making process on which investments meets the strategic asset allocation targets, as well as our view on the quality and attractiveness of the investment.

Part Four: Select Investments

When going through the process of selecting investments, Morningstar’s research can assist with identifying the right building blocks for your portfolio. Simply apply our new location and asset class filters to 5-star stocks, moat-rated stocks, medallist-rated funds and medallist-rated ETFs that align to your strategic asset allocation targets.

Fund Screener

The Morningstar Fund Screener is a tool that can be used to find investment trusts, superannuation funds, pensions and annuities by fund manager, category, assets, minimum investment and returns criteria. We also include the Morningstar Rating as a search criteria.

Morningstar Analyst Rating and Morningstar Star Rating

The quantitative Star Rating analyses the historical performance of a fund, looking backwards. It ranks funds from one to five stars, based on past performance—both return and risk (volatility). It uses focused comparison groups to better measure fund manager skill. As always, the Morningstar Rating is intended for use as one step in the fund evaluation process. A high rating alone is not a sufficient basis for investment decisions.

The qualitative Morningstar Analyst Rating is the summary of our forward-looking view of a fund. It is the outcome of a collaborative process based on a site visit, manager questionnaire, quantitative and holdings-based analysis of the portfolio, and an assessment of key issues identified by our analysts.

Morningstar Analyst Ratings Different types of investing accounts

Superannuation

Superannuation’s tax advantages and the forced discipline derived from restrictions on access to your funds makes it an ideal vehicle to invest for your retirement.

Super is taxed at 15% on pre-tax contributions and earnings. When you are in retirement the rate on funds in your pension account changes to 0%. This is far less than the marginal tax rates or the amount you would pay on income outside of Super. This can make a huge difference to your retirement outcomes and ultimately, how comfortable you are in the latter stages of your life.

If you are not in a Self-Managed Super Fund, chances are the investment vehicle you are using is a managed fund. There are all varieties of managed funds which vary in what they invest in, fee levels and expected returns. As we covered in Part 1, regardless of age, many women choose to invest in more conservative options than men. Over the long-term, this might reduce volatility risk (the swings in the value of your portfolio), but it can significantly increase the risk of not reaching your goals.

The first step in looking at your Super is to ensure that you consolidate your superannuation accounts. Having several Super accounts often mean you are paying not just a percentage fee but also a dollar-based administration fee on each account. These fees will eat into your returns. If you’re not sure how many super accounts you have or where they are, your My Gov account should have a view of any super accounts that you have (as long as they are linked to your TFN).

Another key step in getting the most out of your Super is to check your insurance. You can do this by accessing your super account online, calling your superfund or checking recent statements. It’s important to ensure that you have adequate insurance (in and out of super). However, if you are over-insured in your super fund, this can have a detrimental impact to your superannuation balance over the long term. Usually, when you enter a superannuation fund, default insurance is issued with your superannuation account. It is essential you review this and see if it is adequate for your needs.

There are several types of insurance that can be assigned to your superannuation account where you will be paying premiums—Life, Salary Continuance and Total and Permanent Disability (TPD). Depending on your needs and circumstances, all or none may be relevant to you. To assist you in understanding your insurance needs, MoneySmart provide an interactive calculator for life insurance that gives guidance on whether you may need to consider this type of insurance. You can find it here.

Once you have your account squared away you can start selecting investments. There are several considerations in selecting a managed fund to invest in. Although the taxation environment differs from investing outside of superannuation, essentially the same principles apply between super funds and regular managed funds. The Morningstar Guide to Fund Investing covers everything you need to start investing in funds, including any considerations you must make, and how to make an informed choice based on your circumstances.

One of the biggest debates with superannuation is what sort of fund to choose. Funds vary from retail, industry, corporate and public sector. Self-Managed Super Funds also exist outside of those listed, but they may only suit certain circumstances. We’ll look to focus on what’s available outside of SMSFs.

The main funds that are available to the general population are retail and industry funds. The main differences between the two are what they do with their profits. Industry super funds usually redistribute profits to their members, often resulting in low cost options for their members. Retail funds are for-profit but offer specialised investment services and specialised peripheral services like insurance.

Industry funds have skyrocketed in popularity as consumers became hyper aware of fees, and the distrust in mainstream financial institutions grew due to unwarranted commissions and service fees. However, retail and industry offerings have become increasingly transparent through overhauls of regulation and consumer demand.

As mentioned, our Fund Investing Guide runs through the main considerations that may determine if a fund is right for you, regardless of whether the fund is retail or industry. This may help you understand what’s best suited for your circumstances.

Investing outside of super

There are several different vehicles you can invest in, depending on what suits your needs and what you are comfortable with.

Managed Funds

Managed Funds are pooled investing vehicles - it combines money from multiple investors and purchases assets chosen by a professional manager. Pooling funds with other investors allow you to access professional managers, who in turn can put your money in varying asset classes which may be difficult for you to invest in directly. This approach may also diversify your risk, for example, if one asset class dips another will be there to pick up the slack.

Managed funds are good for investors who:

Are time poor;
Want a professional to make investment decisions on their behalf;
Have a smaller lump sum to start investing with—you can start investing with as little as $500;
Want to invest from each pay check—most managed funds don’t charge to make additional investments—this allows you to self-pace and budget away money from each pay cycle, allowing you to accumulate funds without incurring brokerage each time;
Don’t have to access capital in the short term.

If managed funds sound like they could add value to your portfolio, please reference the Morningstar Guide to Fund Investing. This guide will walk you through all the steps to picking a fund, considerations you must make and how to invest in them.

ETFs

Exchange-traded funds are an easy and affordable way to gain exposure to a range of local and international asset classes and thereby diversify your portfolio, but like all investments, there are risks you should be aware of.

ETFs are good for investors:

Who don’t have to access capital in the short-term
Can invest in parcels of money as you incur brokerage—the less trades you make, the less expenses attributed to your investment
You’ve constructed your portfolio and understand where you need exposure

Please refer to the Morningstar Guide to ETF Investing for our comprehensive coverage of how to invest in ETFs.

Direct Equities

Purchasing ‘shares’ means that you are a partial owner in the company. You may receive income (known as dividends) at a set frequency each year as well as capital growth.

Direct Equities are good for investors:

Who want control over their investments;
Can invest relatively large amounts of money;
Who can dedicate time to research and following individual companies;
Have long investment time horizons.

Please reference the Morningstar Guide to Share Investing. This guide runs through the factors that should be considered when making an investment in direct equities.

Adjust your expectations but be disciplined with your approach.

Women are great investors. Over the long term, we outperform men. Investing isn’t about pouring over financial statements or investor documents—it’s not just about analytical skill or being an expert at industries. Investing is about discipline—ensuring that you have a financial plan and that you are staying the course.

Whether you currently invest or your new to the game, you’ll hear a lot of noise about timing markets, buying low and selling high. Of course, this is a key contributor to success, but long-term investments will prove successful if the fundamental analysis and groundwork is done on day one.

Be confident with your approach and go in with a long-term view of reaching your goals.

Resources to support you on your investing journey

ASIC MoneySmart

MoneySmart is a great website rich in resources, run by ASIC. They have resources to assist almost every planning process spoken about in this guide. Their categories include:

Manage your money;
Reduce your debt;
Plan for your future;
Grow your wealth.

A couple of the tools that I use often include their budgeting template and their super contribution optimiser.

PayCalculator

PayCalculator does what it says on the label—it calculates your pay. What I really like about PayCalculator is it allows me to include my HECs liability and change variables such as my employer contributions. It’s flexible enough to give you an accurate view of your earnings regardless of your personal situation.

Ellevest

Ellevest is a US company that is looking to ‘redefine investing for women’. While Aussie citizens can’t invest, you can subscriber to their newsletter. It is aimed at a younger demographic and focuses on issues where women often have questions about their finances. The advice is provided in fun and engaging ways. Reading their newsletter is one of the highlights of my week. (Full disclosure—Morningstar is a partial owner).

Morningstar Premium

Chances are that you are reading this on Morningstar Premium. Morningstar was founded in 1984, with the simple mission of helping every day investors gain access to the same information that large institutions have about investing. Morningstar Premium gives you access to our analyst ratings across equities, funds, ETFs and hybrids. Regardless of your level of sophistication, you can rely on Morningstar’s analysis to be stringent, independent and digestible at all levels of experience.

Assistance with tracking your portfolio

At Morningstar we focus on the investor and not the investment. That is why we are proponents of goals-based investing. Everything starts with your portfolio. Your portfolio is more than a set of financial instruments. It is the means to help you achieve your goals in life. Morningstar Premium is designed to help you build, monitor and analyse your portfolio to achieve your goals - whether that entails financial independence, a fulfilling retirement or giving future generations a leg up on achieve their dreams. To learn how to design a portfolio to achieve your objectives you can refer to the Morningstar Guide to Portfolio Construction.

The best place to get started with Morningstar Premium is by setting up your portfolio. Morningstar’s My portfolio feature is powered by Sharesight and provides a comprehensive portfolio management solution. The My portfolio feature is integrated with Morningstar’s data and research ratings so you can check how our analyst’s rate the holdings in your portfolio. My portfolio also allows you to track and evaluate your performance against Morningstar indexes.

As part of your Morningstar Premium subscription you have access to Sharesight’s Investor Plan which allows you to establish three separate portfolios with unlimited securities. Sharesight offers an easy sign-up process through automated connections with brokers and auto updates to your portfolios as you collect investment income and trade. Sharesight also offers a full set of performance and tax reports and integrates automatically integrates with your Morningstar Premium account.

Assistance with evaluating investment opportunities

As a leading independent provider of investment research, Morningstar provides our readers with support in assessing new investment ideas, reviewing current portfolio holdings and / or validating third-party advice.

Morningstar’s Equity Research Reports: Morningstar’s Equity Research Reports provide a comprehensive view of each security that we cover. We provide an overall recommendation based on our calculated intrinsic value compared to the current price of the security. The key to our evaluation of each security is our assessment of the four key components of our fundamental analysis: the fair value estimate, uncertainty rating, economic moat and stewardship rating. Our analyst report also includes, our full investment thesis and comments on the valuation and risk of the security.

Morningstar’s Manager Research: Morningstar’s Manager Research team covers ETFs and Managed Funds. We provide our forward-looking qualitative Morningstar Analyst Rating along with a detailed research reports. Our full analyst report includes our view of the role that the fund or ETF can play in a diversified portfolio as well as our assessment of the investment team, investment process and the various fees that investors are charged.

Discover investments

We provided a brief overview of our asset class filters in the ‘Selecting Your Investments’ section. Morningstar Premium allows you to filter assets by what you require when building your portfolio. There are a few filters below that can assist with identifying opportunities.

Stock filter

Morningstar Premium provides access to a vast array of stock data and research that allows subscribers to Discover investments. We provide data on over 43,000 global equities. As a Premium subscriber you can access qualitative research from our team of over 100 equity analysts on more than 1600 companies. For the remainder of our coverage universe we provide our proprietary quantitative ratings which are designed to mimic our analyst-driven ratings.

Our stock filters can be used by Morningstar Premium subscribers to comb through our comprehensive set of data and research to discover new investment opportunities. We have two sets of stock filters available:

Pre-defined filters: Our pre-defined filters identify companies that we believe are trading at a significant discount to what they are worth, have a long-term competitive advantage or meet the criteria for a thematic such as inclusion on our Global Equity Best ideas list or securities that generate sustainable income.
User-defined filters: Select your own criteria to filter more than 43,000 global companies. You can select 15 filters across 5 categories including Morningstar analyst ratings, valuation and profitability measures, growth metrics and performance history. Filters can be saved to allow you to periodically check if additional companies meet your criteria. To set up and save a stock filter follow this link, select “Add filter”, select “Stocks”, select “Filters” and select your criteria. Selecting “Apply” will filter through our universe of equity data to identify the results. To save the filter simply select “Save” and add a name and description. Your filter will be available on the “Investment filters” tab.

Fund filter

Morningstar Premium provides access to data and research on Australian domiciled funds. As a Premium subscriber you can access qualitative research from our team of over 15 Sydney based manager research analysts on more than 350 managed funds.

Our Fund filters can be used by Morningstar Premium subscribers to comb through our comprehensive set of data and research to discover new investment opportunities. We have two sets of fund filters available:

Pre-defined filters: Our pre-defined filters identify funds that our analysts believe have the ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term. We have grouped the pre-defined filters by different asset classes.
User-defined filters: Select your own criteria to filter through our universe of funds. You can select 15 filters across 5 categories including Morningstar analyst ratings, yield and cost and performance. Filters can be saved to allow you to periodically check if additional funds meet your criteria. To set up and save a stock filter follow this link, select “Add filter”, select “Funds”, select “Filters” and select your criteria. Selecting “Apply” will filter through our universe of fund data to identify the results. To save the filter simply select “Save” and add a name and description. Your filter will be available on the “Investment filters” tab.

ETF filter

Morningstar Premium provides access to data and research on ETFs. As a Premium subscriber you can access qualitative research from our team of over 15 Sydney based manager research analysts on more than 70 ETFs.

Our ETF filters can be used by Morningstar Premium subscribers to comb through our comprehensive set of data and research to discover new investment opportunities. We have two sets of ETF filters available:

Pre-defined filters: Our pre-defined filters identify ETFs that our analysts believe have the ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term. We have grouped the pre-defined filters by different asset classes.
User-defined filters: Select your own criteria to filter through our universe of ETFs. You can select 15 filters across 5 categories including Morningstar analyst ratings, yield and cost and performance. Filters can be saved to allow you to periodically check if additional funds meet your criteria. To set up and save a stock filter follow this link, select “Add filter”, select “ETFs”, select “Filters” and select your criteria. Selecting “Apply” will filter through our universe of ETF data to identify the results. To save the filter simply select “Save” and add a name and description. Your filter will be available on the “Investment filters” tab.

Learning to invest

As part of Morningstar, my colleague Emma Rapaport writes great ‘Investing basics’ articles that explore foundational investment and personal finance concepts. I’ve found them really useful for keeping me on track and opening my perspective to other opportunities. You can find these articles in the Personal Finance section on premium.morningstar.com.au