Getting started in shares this year
Knowledge and the right strategy the wise approach to successful investing
All too often when I chat to people about the sharemarket and why they are not investing, I’m invariably told the sharemarket is just legalised gambling, or you need to be a professional to make money from it. Both statements are incorrect and come from a lack of understanding of the sharemarket, as literally anyone can invest in shares and be profitable.
Let me explain…
Buying a lotto ticket is gambling as you have very little chance of getting a return. The result is basically random and the probability of winning is one in many millions. For the most part, so is going to the casino as the odds of being successful are largely stacked against you.
So too in the sharemarket there are people who randomly pick shares without any real strategy, which makes them gamblers. They live in hope of making a return. Unfortunately, this group would be the majority of investors. The other group have strategies and systems to increase their probability of being consistently profitable. Which one describes you?
Before I talk about how you can get into the sharemarket in 2017 and become one of those consistently profitable people, let me give you 4 points I believe about the market:
- Investing in the right shares is not rocket science, it’s simple when you know how.
- Investing in shares is not time consuming, it takes very little time when you have a process.
- While risk exists, investing in shares is not that risky if you implement simple but powerful rules.
- Absolutely anyone can be a good investor without a lot of effort.
So how can you get started in the sharemarket the right way?
When people come to me for help with their sharemarket investments, invariably I’ve found that many have made a mess of it or at least did not get what they set out to achieve, simply because they stepped into the market without a strategy or system. They were essentially guessing, so it doesn’t come as a surprise that they failed.
“Only put your money at risk if you know you have a high probability of success”
These were wise words I received when I was young. It made sense to me, as to do otherwise would be gambling.
In short, investors need to understand risk, money management, how the market or stocks unfold in trends, and what drives share prices. While that may sound a little complex, if you are prepared to learn, you will grasp it and the rewards will come.
In general, investors get their financial information from newspapers, friends, or they surf financial websites. That’s great if you are financially literate, but if you don’t understand the real value of the information you are getting or how to filter what you read, then it does not matter where it comes from or how reliable it is.
Four steps to get you started:
- Start reading quality independent financial news from credible sources, but don’t go overboard. Choose a couple of good sources of information as “less really is more”. Also, by keeping your information sources limited you will not become overwhelmed, which is common among those new to the market.
- Find a good broker. For new investors, consider choosing a good advice broker who can assist you until you become more confident. Yes, you will pay more in fees, but you will broaden your understanding quicker and this will ultimately help you avoid the mistakes beginners make when placing orders. Look at the return, not the cost, and remember you get what you pay for.
- Do the basic online sharemarket course with the ASX, after which you should do a more comprehensive course with a good educator. Most people need structured learning and confidence in the quality of the course.
- While you study, enrol in the ASX sharemarket game to test your skill. Reason being, once you implement the first three steps you need to be the “wise man” and test your knowledge before entering the market with your money.
I have taught people at all levels of their education, from as young as 16 to those in their 80s, to be successful investors and traders. Age and financial position ought not deter you from starting your journey. The only thing holding you back is you.
A portfolio approach
Learning to read the market is one thing, but you also need to get your portfolio started.
Before considering how to build your portfolio, we need to discuss the fact that having a “buy and hold” approach to the sharemarket is not the answer to your financial success. Using a “buy and hold” strategy is like burying your head in the sand, hoping your investments might do well.
Investors often default to this strategy as they simply do not know what to do or how to get started.
Most, having adopted this approach over the last decade or so, would have seen poor returns. Using a “buy and hold” approach will see gains made during bullish periods decimated in bearish periods, which will invariably occur. Using an active approach allows you to participate in a bullish run and then sit on the sidelines to avoid the market downturns.
To achieve this balance, use a capital preservation technique, such as a stop loss (a pre-determined price point at which you sell your shares), and in doing so achieve superior returns simply because your portfolio will not suffer large losses.
When constructing your portfolio, those new to the market might like to:
- Start by researching 12 good dividend-paying stocks from the top 20 or top 50 shares on the Australian market.
- Start your research strategy by dividing your money equally between them as history has proven these stocks have a higher probability for growth over time. Then start monitoring your performance. The benefit here is that you will not lose your shirt on these stocks and the probability is high that your portfolio value will rise over time.
The key to your ongoing success, however, will be your ability to know when to buy and sell, not just knowing when to buy. Therefore, learn rules that allow you to do both well.
About the author
Janine Cox is the Senior Investment Analyst at Wealth Within.
Janine Cox is the Senior Investment Analyst at Wealth Within.
First-time investors is a great place to start for those thinking of investing in shares or listed funds for the first time.