Any newcomer to share investing can use a helping hand. There is nothing more focusing of the mind than starting the share investing journey using our hard-earned savings. It brings to bear all the suite of emotional challenges of human nature like the fear of losing money and greed to make more money. In assisting my son to set up an online share platform, the joys and travails of learning how to build a share portfolio has dominated our conversations. The WhatsApp messages coming thick and fast.
For any skill set or new knowledge, our best lessons come from experience. Share investing is no different. It is personal and everyone has different goals, time frames and amounts to invest. The journey for any of you starts with learning how to manage the risk of putting your savings to work. There is nothing more visceral than watching share prices rise or fall after purchase. Starting the process can seem a bit overwhelming, but there are some helpful ground rules to consider when you get started:
- Setting up an online share trading account: It is worth conducting some research, finding what works for you. Costs, ease of transactions and options to invest overseas are just some considerations. After trialling a number of Apps and different services my son decided to go a more comprehensive service, like Commsec.
- Portfolio parameters: Once the account is set up and the funds available, we discussed what parameters would form the portfolio. The ability to hold shares through the share market cycles (ups and downs) adding dividend income when it is received and buying more shares when the market falls, is a winning formula. One is never too old to start but time helps. This strategy applies to anyone of any age.
- How many shares to buy? With a focus on long-term wealth growth, any share investment needs to be set by boundaries. Starting with how much cash is available will determine how many shares are bought. Most share services offer a minimum trade of $500, allowing new investors to start small and add over time. The rule of thumb is the larger the amount to invest the more shares, or the more eggs in the basket. This spreads the risk and is called diversification. With smaller amounts and less knowledge ETF’s are excellent. An ETF (exchange traded fund) is a listed share that mirrors the performance of the share market, for example.
- Which shares to buy? For new investors, quality is the word. A few characteristics that define this are a strong balance sheet; growth in dividends over time; robust competitive advantage; less cyclical earnings i.e. think businesses that don’t rely on a cycle like oil or housing development. Australia’s best example is CSL, a world leader in blood plasma and flu vaccines.
- Pulling the trigger: Buying shares is the next challenging aspect. The good news for you, it becomes easier with experience and confidence. To start pulling the trigger begs the questions, at what price, today or tomorrow? These speed humps are very personal and as I explained to my son, no one has a crystal ball. Buying good quality shares for the long-term is the aim. Start with a small exposure- the number of shares and the amount invested in each and then add more money over time. The sell -off in global share markets due to the coronavirus is a classic case in point of when it is an opportune time to invest, not for tomorrow or the next week but through the passage of time. Most investors feel more emboldened to buy more shares when the market is rising, it’s like a confirmation bias that we are doing the right thing. However, as the coronavirus correction has shown, share prices are far more appealing after they have fallen. It is always worth keeping some powder dry (cash available), as markets can move up and down, known as volatility and the challenge is to be brave during periods of fear (market selloffs).
Like my son, you too can start the share investment journey. Plan and prepare, with small steps to start and I think you will be pleasantly surprised by what you can achieve.