Why you should invest in the share market

I wrote the following article for Her Magazine, which was published in their August issue

For some, the thought of investing in the share market is enough to make them go weak at the knees or worse. It conjures up thoughts of gambling and crippling losses. And it reminds them of the only two years in recorded history that they associate with a financial event: the share market crashes of 1929 and 1987. You would have to be nuts to even think about investing in shares.

Wouldn’t you?

Well, no actually. A better definition of nutty would be not thinking about investing in shares. Why? The answer is simple. Shares produce higher returns than other types of assets. Stock exchanges have been around for a very long time and innumerable studies have come up with the same result: over the long haul shares do best.

The phrase ‘over the long haul’ is important because occasionally there can be quite long periods when shares look as if they are not going to deliver the best long term performance.

A major reason that people lose money on shares is that when the market falls, as it inevitably will, they panic and bail out, usually after most of the damage has been done. When the market rises again, as it inevitably will, they are not there to reap the benefit.

When you commit to shares for the long haul you soon realise that it is not about share prices; it’s about companies. If you focus on the share prices you are likely to get caught up in financial ratios, trading strategies and a high-risk game of trying to predict (in reality, guess) whether prices are going to go up or down. And even if you are lucky enough to predict a price rise or fall, that will not help you much unless you can also figure out when. We all know it is going to rain sometime in future but unless you know when, you can’t be sure the washing won’t get wet.

We are not talking rocket science here folks. You DO NOT have to be a financial guru and you do not need a financial advisor to do well in the share market. All you have to do is focus on companies. Look for companies with a proven track record offering top quality products and services that you understand and that you think will be in strong demand well into the future.

Here are my 10 tips for DIY share market investing:

• Plan to be in there for the long haul.

• Only invest money that you are confident you are not going to need at a particular time in the future. Otherwise you might be forced to cash up your shares in a downturn before they have delivered the superior return you are looking for.

• Start out small and increase your investment over the years as your knowledge and confidence grows. That way you also avoid the risk of investing all your money at a high point in the market.

• Spread your investment over a number of different companies in different industries. For example, if you have $10,000 to invest consider spreading this over, say, 5 companies. Diversify further as your total investment grows. And remember it is as easy to buy Australian shares as those in NZ.

• Read articles about companies of interest to you in news papers, magazines and online. You will be surprised how quickly your knowledge and confidence grows. You can use online tools such as Sharesight to check the historic performance of a company to help you with your investment decisions.

• There are innumerable share purchase recommendations for free and there are many individuals and organisations that provide recommendations to paying subscribers. They can be a valuable source of guidance and information but don’t follow them blindly. Do your own homework and come to your own decisions.

• Focus on companies not share prices when you make your investment decisions.

• Don’t panic if share prices suffer a sudden fall. You know in advance that this is likely to happen from time to time just as you know that in the long run shares are likely to give you the best return.

• Start using a good share portfolio management system such as Sharesight from day one. It's important to keep a good record of the shares that you own because you will need this information to file your tax return. It's also crucial that you can easily and accurately assess how well your shares are performing. Sharesight virtually eliminates the administrative work associated with owning shares. All the data you need for your tax return is provided automatically including your Foreign Investment Fund earnings if you are caught up in this nightmarish piece of legislation. And, best of all, Sharesight shows you the true, annualised financial return on your shares including capital gains, dividends and currency movements.

• Have fun! Believe it or not, studies have shown that most DIY share market investors thoroughly enjoy managing their investments.

This information is not a recommendation nor a statement of opinion. You should consult an independent financial adviser before making any decisions with respect to your shares in relation to the information that is presented in this article.

FURTHER READING

• Millennial investors smash avocado myth in ASX report
• Investors need to break these 3 bad habits once and for all
• How do you choose which shares to buy?