Wise up Gen Y!

Posted by Alex Galin 05 October 2015 @ 11:00am Investing Insights

We are the mattress stuffing generation and it’s time to change our habits.

We have become so good at saving and so judicious about spending that we put our parents' generation to shame.

We are not only saving and scrimping so that we have a cushion on rainy - we are saving and scrimping for financial freedom. For the freedom to work how we want - but mostly, when we want.

But our discipline in saving and caution in spending comes at the worst possible time.

We are living through the lowest-interest rate environment and most sustained property boom in Australian history. This means two things: that our savings aren't growing while they lie in the bank, and we are missing out on the property market because many can't afford to buy.

Our risk aversion means that we are more afraid of losing what we have than losing what we are not gaining. With the inflation rate at 2.1% and the prevailing interest rate at 1.5%, putting money in the banks is the modern-day equivalent of mattress stuffing.

How do we break out of this vicious cycle?

Sure, we should all have a rainy day fund that is equivalent to around 3-6 months of expenses. But the remainder should be invested for growth.

A portion can be put in diversified index Exchange Traded Funds - essentially, investment funds that trade on the stock market that invest in a group of shares (or other assets) and that generally aim to track the performance of an index or benchmark e.g. the ASX200.

And a portion should include participating in the primary capital market - that is, the market for brand new, never-been-owned-before shares. These come in the form of IPOs (Initial Public Offerings, when companies list on ASX for the first time) and placements (when companies that are already listed raise capital by issuing new shares).

If the stock market is a department store (where there are some bargains if you take the time to search, but everything is fully priced) the primary market is the 'sale' section, which is what makes it so lucrative.

When you buy shares in the primary market, you're almost always buying them at a discount. In an IPO, this is the company's first sale of shares so investors are taking on risk that management will do what they say they will do with the money they are raising. There's often a discount associated with that. In the case of a placement, market practice dictates that shares will almost always be issued at a discount to the last traded price to incentivise investors to participate.