Investing in shares: four questions answered
Investing in shares is one avenue for creating wealth, which many approach with a degree of trepidation. Done well it can be beneficial. In our view, the investor should consider and mitigate the risks as the starting point when building a portfolio of investments.
What is a share investment?
Buying a parcel of shares is ultimately purchasing a small part of a business. For example, if you purchase some Wesfarmers shares, you become a part owner in the business. The business will have an intrinsic value per share which varies with business conditions and prospects. This value may not always be correctly represented in the market price on the stock exchange. Should the business distribute some profits as dividends, you will be entitled to a proportion of these.
I’ve heard that for a greater investment return, generally you should expect to bear greater risk. Is that the case with shares?
Investments that carry a higher level of risk tend to have the potential to deliver higher returns in the long term, such as growth assets like shares, property and infrastructure. Those with the potential to deliver lower returns, such as cash and fixed interest, generally carry lower risk levels. When constructing a portfolio, it is a good idea to invest in a manner that is consistent with the level of risk that you are comfortable taking. If you have an adviser, they will conduct an assessment through a discussion and questionnaire to help you identify where you are on the risk spectrum.
A caveat to the above relationship is with shares in isolation. The relationship between risk and return when looking solely at a share portfolio is slightly different. That is, many ‘boring’ low-risk high quality profitable companies, when blended in a diversified portfolio, may have similar long-term return outcomes as companies that are high-risk. Meaning that the payoff for investing in high risk shares versus low risk shares in the long term may not be always be present. (source: https://www.robeco.com/media/d/5/0/d508a609d27fac4a840824a9c176429f_low-risk-stocks-highly-suitable-for-long-term-investors_tcm17-2170.pdf )
How can I invest in shares?
Shares can be invested:
- Directly by owning a portfolio of shares, such as through a Commsec, e-trade account or similar. (A qualified adviser can help recommend and set up a direct portfolio such as this, if they have the right accreditation’s in place)
- Indirectly through ownership of quality Australian share managed fund(s)
- Through ‘index’ funds or ‘exchange traded funds’ or ‘listed investment companies’
- Through Separately Managed Accounts (SMA portfolios) which are share portfolios managed professionally for you.
Each of these vehicles for investment has its advantages and disadvantages, and it pays to seek trusted advice.
What else should I consider when investing in shares?
Diversification, or spreading risk by having a range of companies in a portfolio is an important aspect of a quality portfolio. Aside from having diversification within a share portfolio, one should also consider holding other types of assets such as property, fixed interest, infrastructure and similar.
Match your financial capacity for risk with your chosen investments. A qualified adviser can assist in this process.
Your end objective(s). Have an approach to your portfolio that gives you every opportunity to reach your objectives.
Buying high quality companies. Imagine the share market wasn’t there as a mechanism to buy or sell; would you still invest in the companies you are investigating? Having high quality companies and investments is ideal.
Consider investing in shares as a long-term strategy. Many make the mistake of being too short term in their thinking.
Be realistic with your available time. If you are a time-poor executive or lawyer, you will normally find that getting trusted and trustworthy assistance in making investments will be in your best interests, freeing up your precious time.
In a blog article to follow, we will provide a useful analogy for understanding the share market itself, as used by Ben Graham and Warren Buffett.
Please contact us should you wish to discuss further.
General advice disclaimer: The information provided in this article (including taxation) is general in nature and does not consider your individual circumstances or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. Where applicable, you should read the relevant product disclosure statement and seek personal advice from a qualified financial adviser.
The views expressed in this article are solely those of the author; they are not reflective or indicative of Millennium3 Financial service’s position and are not to be attributed to Millennium3. They cannot be reproduced in any form without the express written consent of the author.
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Disclaimer: Millennium3 Financial Services Pty Ltd ABN 61 094 529 987 AFSL 244252. The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide. If you no longer want to receive this information please contact our office to opt out. The views expressed in this publication are solely those of the author; they are not reflective or indicative of Licensee’s position, and are not to be attributed to the Licensee. They cannot be reproduced in any form without the express written consent of the author.