Getting started in share investing with $10,000
People always come to me for money-making ideas and I reckon you can’t go past the sharemarket. Investing in shares can really help build your wealth.
Did you know that if you bought $1,000 of Commonwealth Bank of Australia shares when it floated back in 1991 at $5.40, you would get 185 shares. They are now worth $77.44*. Your total investment is now worth $14,326. That’s just the share price appreciation. CBA has also paid $46.88 in dividends, which would earn you $8,672 (plus franking credits)
Therefore, your total return for 185 shares would be $22, 998 or about 23 times your initial cost.
Imagine what you could do with $10,000?
There are of course different ways for you to approach investing in the sharemarket. You could go down the direct path and invest in shares or through listed investment options such as an exchange-traded funds or a listed-investment company.
You could also invest through a listed managed fund. Let’s look at these options closely.
The two big benefits of investing in shares are capital growth from an increase in the company’s share price, and the income you get through the dividends the company pays to shareholders.
It always beggars belief that people are wary of investing in the sharemarket because of perceived risks – funny you don’t get the same argument against property.
The risks are of course that the share price could fall, and if the company goes broke, you will be the last in line to be paid. You will also have to be able to stomach volatility due to daily share price changes and dividends may also vary.
But choosing the right companies such as quality blue-chip shares will help you avoid those types of companies. Knowing what to buy could be tricky but you could start with name recognition. That is buying companies whose products you use such as the supermarkets like Wesfarmers (who owns Coles) or the banks.
In fact, quality blue-chip businesses are a fantastic creator of long-term tax effective wealth. Not only have companies like Commonwealth Bank grown in share price but they have also provided investors with growing dividends. You have to love that income!
With $10,000 you could invest across a number of quality stocks. It is probably best to diversify across a few companies rather than investing all your money in one stock. That way you are limiting your exposure to any one silly CEO or government decision that can hit the share price.
Choosing the right broker
You will need a broker to buy and sell shares. When choosing a broker you can go via the discount broker model or use a full-service broker. Discount brokers are obviously cheaper, and while they offer limited education services they won’t hold your hand when buying shares. Full-service brokers are a little more expensive but offer more extensive services. These types of brokers, however, tend to target much wealthier investors.
If choosing individual shares seems too much of a headache, you can get the professionals in by investing in exchanged-traded funds (ETFs), listed investment companies (LICs) or a listed managed fund.
ETFs and LICs are both listed investments that trade on the ASX like a stock. The beauty about these investments is that they give you access to a diversified portfolio in one transaction.
For example, with an ETF like the iShares S&P/ASX 200 ETF (IOZ), you are buying all the companies in that index such as the big banks and Telstra.
ETFs and LICs are fast and easy to execute. Their prices are transparent, which means LIC and ETF investors can see the value of their market investment right to the very minute. These investments tend to have lower turnover, which means better tax efficiency. Low turnover can also help reduce trading costs.
ETFs, however, track an index; therefore they don’t outperform the index they track. LICs, on the other hand adopt a more ‘active’ approach to stock selection. That is, they have an investment team that makes all the stock decisions.
Another option is to look at listed managed funds. These funds are registered with the ASX mFund service.
This is a relatively new service initiated by the ASX, which wanted to give investors easy access to managed funds. You can now invest in a managed fund through this platform but without the paperwork and time-consuming headache you get when you buy an unlisted managed fund. The good thing is you also get that instant diversification in one click!
The ASX basically provides a settlement service, so you can buy and sell these managed funds through your broker – just like shares.
The mFund service also brings together investors’ holdings under one CHESS platform. This allows you to look at your individual stocks, ETFs and managed funds in one simple statement.
Despite all the topsy-turvy movements of the sharemarket, long term investors shouldn’t go wrong with investing in shares. You just have to make sure you get the strategy right and invest in quality businesses. If you want to go down the professional manager path – make sure you go with quality managers with good strong track records.
I reckon the market is oversold at the 5,000 level. It could even fall further, but I am expecting it to climb back to 5,500 which could well be in 2016. If we do get to 5,500, that means in 12 months you would have made 500 points on 5,000 – that’s a 10 per cent gain, and if you include dividends, it’ll be closer to a 15 per cent gain. Much better than those dismal 2.5 per cent term deposit rates going on at the moment and it gets you closer to that home deposit!
About the author
@peterswitzer is the founder of the Switzer Super Report, a newsletter and website for self-directed investors. Designed for investors who want to take control of their investment decisions but may be time-poor, the Switzer Super Report provides actionable ideas to grow and build your wealth. Start a 21 day free trial. *As of 14.12.2015
@peterswitzer is the founder of the Switzer Super Report, a newsletter and website for self-directed investors. Designed for investors who want to take control of their investment decisions but may be time-poor, the Switzer Super Report provides actionable ideas to grow and build your wealth. Start a 21 day free trial.
*As of 14.12.2015
First-time investors is a great place to start for those thinking of investing in shares or listed funds for the first time.