Anthony Keane* says with tax refunds hitting bank accounts, now could be a good time to buy shares……
Record highs for the stockmarket and $1000-plus tax refund bonuses this year have created a tempting combination for millions of Australians to start investing in shares.
Our sharemarket has surged, up 20 per cent since Christmas, making stockbrokers and analysts hesitant to recommend ploughing money into shares near a peak.
While it’s better to buy shares at a discount than at a record high, many people make the bigger mistake of never investing, then missing out on massive benefits from reinvested dividends compounding over many years.
Nabtrade investment specialist Gemma Dale said the single most important step for would-be investors was to “get started”.
“Very often people talk themselves out of it, and we are often victims of our own desires to spend money on other things that are more fun,” she said.
“Keep adding to it, particularly if you are young — you have time and compounding on your side.
Most older people would give their left arm for that.”
The Federal Government’s tax cut package is handing out bonus tax refunds this year of up to $1080 for 11 million Australians earning up to $126,000 a year.
Ms Dale said spending the tax bonus on a new share portfolio could be a “a spectacular use of that money” by turning a lump sum into a growing investment.
Practice run
Ms Dale said a great starting point for beginners was to open an online stockbroking account.
“It’s free — you don’t have to put any money in, but once you have opened it you can set up a watchlist and get access to thousands of research papers, watch videos on how to trade, get market updates and listen to podcasts,” she said.
“You can behave like a trader without having to put a single dollar on the line.”
The costs
The minimum parcel of shares you can buy on the Australian Securities Exchange is $500, although investors typically start with $1000 or more to reduce the trading costs as a proportion of their investment.
Costs for a typical online trade can be just $10- $15, while full-service stockbrokers charge from $100, which includes discussions with clients.
Bell Direct equities strategist Julia Lee said almost one-third of Australian adults had bought shares on the stockmarket.
Traps for beginners
Ms Lee said one of the biggest traps for first-timers was wanting to make money as quickly as possible.
“This means that they often take large risks, which increase the chance of the loss of money,” she said.
“If starting out, I’d recommend starting on lower risk products first.”
Ms Lee said a general rule of successful investment management was to cut your losses early and let your winners run, yet in practice “it’s mostly entirely the opposite”.
Investors often sell their winners to grab profits and hold onto their losers, hoping they will bounce back.
“This doesn’t make any sense, because a stock price’s future performance is unrelated to what price you bought the stock at,” Ms Lee said.
“In most cases it’s the stocks that go up that continue to go up and the stocks that go down that continue to go down.”
When to buy
Ord Minnett senior private client adviser Paul Kirchner said most stockbrokers were currently “treading warily” with the sharemarket.
“We are watching Brexit, Trump, China and a slow economy here,” he said.
Mr Kirchner recommended new investors put their money into the sharemarket in smaller chunks at regular intervals.
“Don’t fire all your bullets in one go — spread your risk,” he said.
This is known as dollar-cost averaging, and means you won’t put all your money in at the peak of the market just before it drops sharply.
Buying at regular interviews smooths out long-term returns.
What to buy
Mr Kirchner said new investors often bought listed investment companies such as Argo Investments or Australian Foundation Investment Company, which spread people’s money across a wide range of stocks that their analysts like.
“But the growth area has been exchange traded funds (ETFs),” he said.
“They can also give you exposure to international markets through the local ASX.
ETFs split each dollar of your investment into every member of a specific sharemarket index, such as the ASX 200, ASX 50 or the US-based S & P 500.
Your investment returns mirror the rises and falls of those broader indices, minus a small management fee usually below 0.5 per cent.
“We are using them more often than ever before, and use them for smaller investors to give them diversity,” Mr Kirchner said.
There’s also a new breed of tech-friendly options that can offer investments through ETFs or direct shares including:
- Raizinvest.com.au, which allows people to round up transactions, make recurring deposits and start investing in ETFs with as little as $5
- Stake.com.au, which allows investors to own direct shares and ETFs in the giant US market starting from $50.
- Robo-advisers such as Stockspot and Six Park that personalise portfolios for investors based on online questionnaires and invest their money through a broad range of ETFs.
These new players charge fees, just like online stockbrokers and full-service stockbrokers, so check their websites first to understand what you’ll pay.
Ms Lee said the biggest ETF in Australia, which tracked the ASX 200 index, was State Street’s fund with the code STW.
“Companies that are listed on the market are all around us,” she said.
“It’s not hard to start researching companies.”
Ms Dale said it was a good idea to invest in what you know. Many young investors were now buying Afterpay “in the same way parents bought Telstra”, she said.
However, buying shares in just one company is dangerous because you are completely exposed to its success or failure.
Ms Dale said many beginners were choosing to diversify.
“That’s encouraging because it does show an understanding of fundamental investment principles.
* Anthony Keane is personal finance editor at News Corp Australia. He tweets @keanemoney.
This article first appeared at www.news.com.au
