Sharemarket strength is tempting people to enter – or re-enter – the market, but investment experts warn there a few key rules to understand before joining the six million Aussies who already own shares.
The All Ordinaries index of 500 listed companies has climbed 13 per cent in the past three months and is up 20 per cent year-on-year, and some forecasters have predicted good times lay ahead. It has reignited an interest in shares not seen since last decade. However, if you’ve never bought shares, or are thinking about jumping back in after selling out during the global financial crisis, it is important to think before you leap.
Catapult Wealth director Tony Catt says low term deposit rates are prompting many to start to question the return on their money, and he is “as bullish about the market today as I have been for three years”, but there are some handy rules to follow.
Keep things simple, only buy companies you understand, and drip-feed your money over time are three big ones, Catt says. He often quotes billionaire investor Warren Buffett’s advice that when you buy stocks you should assume the market will close and not reopen for seven years.
“Would you still invest? It makes people stop and think about their risk, and when they will need their money.”
It is vital to avoid putting all your eggs in one basket. “The keys for investors considering entering or re-entering are firstly, making sure that they have a diversified portfolio and secondly, looking at areas of the sharemarket that are better placed to provide good returns in the period ahead,” says Macquarie Private Wealth head of research Riccardo Briganti.
“Diversification requires that investors not only have stocks in different sectors but also to diversify other risks.” Investors should perhaps look beyond the current love affair with high dividend payers such as banks and property trusts, and examine stocks that may benefit from an improving economy, such as retailers.
If you have only a few thousand dollars to start with, buying individual stocks is probably not a good idea because you’ll spend too much money on broking costs. An alternative is buying a stock that spreads your money across many different companies. Exchange-traded funds, which mirror an index such as the ASX 200 by holding all the stocks in that index, are one option. Another is listed investment companies that spread their money across several quality stocks.
“Argo and AFIC are our preferred listed investment companies,” says Prescott Securities equities specialist Travis Adams. “They’re cheap, have good diversification, and if the market does go up, you will get that ride as well.”
Adams says dollar cost averaging – spreading your purchases over several months – is a great way to start.