High Risk

To create wealth, you need a dollar to make a dollar. $5000 is a small amount to start with. However, it’s a start. Here are some of the options that I would look at:

- Andrew Zbik

1 Invest in an Australian equity ETF

$5000 is too small in my opinion for individual share trading and stock selection. Also, the track record of most active equity managers is now something to question. Over the past five years, 69.88% of Australian equity general managers have underperformed the ASX 200. For international equity managers a staggering 93.15% under perform the index. Ouch! I used to rely solely on stock-picking for my clients. I don’t rely on it as the sole equity strategy any more.

The most appropriate way to get exposure to the equity market with a small amount of cash is via an exchange traded fund. With an ETF you gain a broad basket of direct shareholdings that mimic a chosen index. The fees are substantially lower than those of a traditional managed fund and there is the benefit of daily liquidity on the securities exchange.

One of my favourite ETFs is iShares Core S&P/ASX 200 (ASX: IOZ). It invests in the top 200 companies on the Australian stock market. The dividend yield is currently 3.22% (or 4.33% fully franked). The management fee is 0.15%, so your only other cost would be brokerage.

Since the ETF’s inception in October 2010, it has provided a total annualised return of 7.42%. Thus in 32 years you will make your $50,000 target. I am currently using an 8.5% total return forecast for the Australian market over the long term, so based on that assumption we would expect to achieve our $50,000 target in 25 years instead. Will you still be working then?