How to start playing the sharemarket game
Stick to the basics – and keep it simple – when you start playing the sharemarket game
Planning prevents piss-poor performance. I love this statement. It was the catchcry for my son’s team during his school rowing seasons and it’s good general advice. It applies to many things from sport to finance and everything in between.
Armed with knowledge you can plan for your investment portfolio or how you’ll adapt what you already have. It’s never too late to weed and prune what you’ve got or to invest in some new shares.
Planning the “best” investment portfolio for you will require a little preparation but nothing too arduous. Here is a go-to list of points to consider when starting out.
First-time investor
Are you a student or a young professional saving for a holiday or housing deposit? You can start a portfolio with as little as $500. The less money you have the simpler and more risk free the investment should be. It’s just not feasible (from a cost standpoint) or reasonable to think that you should buy five to 10 separate shares at $100 each. For anything less than, let’s say $2000, as a first-time investor, you should probably only consider buying one exchange traded fund to start, such as an exchange traded fund (ETF) that replicates the ASX 200 share index, for example. You can keep contributing to that until it reaches a critical mass of $5000. You could then consider adding some shares, but anything less than $1000 per share is just not worth it. Better to keep adding to the ETF and grow that.
For savings of $10,000-plus you can start to look at the model portfolios that suit your age, risk tolerance and commitment level.
Inheritance money
Inheriting shares or money is sometimes emotionally challenging, as you may put undue pressure on yourself not to make a mistake and lose any of it. Or you may feel conflicted about selling the shares you have inherited to change the portfolio. You may also be a new investor and then the task is more daunting. Depending on the size of the inheritance it may be wise to seek tax advice. Keep to the script, remember costs, don’t invest in anything you don’t understand and consider how the money can be best invested.
Can you add the money to your superannuation, perhaps a self-managed fund? If you’re anxious about the risks, start with low-risk, low-maintenance portfolios (see tables). As your confidence grows and your knowledge base increases, you can select more shares.
Divorce settlement
Investing money from a divorce settlement can be emotionally fraught, particularly for women who may not have much financial experience. The wounds of the divorce are compounded by the fear of the unknown. Now I’m not a divorce counsellor, but I have been there with a young son, starting out in a new town (I relocated back to Sydney from London). I know it can be daunting, but gently, gently:
Be kind to yourself, step back, take a deep breath and don’t rush any decisions.
Try to get some good advice about tax; you want a good family accountant if it’s a reasonable amount.
Think about how much you need to live off and what needs to be invested. When it comes to the investment aspect, think about costs. It’s more likely than not that your money will be better invested in a low-risk, low-maintenance portfolio than anything more costly with an adviser.
Lottery windfall
Having never won the lottery I don’t know how it feels, but I do often hear of people losing it all. So if you win the lottery or the equivalent (as in you receive a large lump sum of money), then you need to be prudent when it comes to investing and spending. In my time I have received sizeable bonuses as remuneration for my work in London. I can assure you I was very disciplined about saving the lump sums either by paying off my mortgage or investing the money in shares. It’s too easy when we’re younger (or older!) to not save any lump sums we receive. It’s so easy to spend and so much harder to make the money we need as we age.
Depending on your level of financial knowledge, I suggest any lump sums should be properly allocated across a number of shares and ETFs, including overseas ETFs. As lump sums are usually bigger amounts it’s important to diversify. So, depending on your ability, knowledge and experience, any of the example portfolios (see tables) would work.
Unhappy existing investor
I know how this one feels, and it’s not always easy to have the conversation with yourself or an adviser about what isn’t working and how to fix the problems. It will come down to you identifying what isn’t working for you and then putting in place a plan to redress the situation. A few considerations:
It’s never too late to sell; holding onto the
“tensaggers” (as opposed to tenbaggers) or the losers isn’t a winning strategy. The losing shares just never recover to your purchase price, so bite the bullet, sell and invest your money in a share or an ETF that will make you money.
Don’t be afraid to change an adviser or sell a managed fund; the world is changing and that includes share investments. Waiting for the pot of gold at the end of the rainbow isn’t sensible. I suggest you follow the model portfolios that suit your age and disposition.
How your age may change your profile
Traditionally, professional advisers recommended that investors had investments in corporate bonds or fixed income equal to their age in years. For example, if you’re 50 years old, 50% of the total cash is invested in bonds. You can buy ETFs or managed funds that give you exposure to high-quality corporate bonds and government bonds. And secondly, given the low-growth world, I would suggest the weightings should be lower.
Arguably anyone under 40 to 50 years old probably should maintain a high to full exposure to shares. Advisers recommended bonds and fixed income because they were considered as lower risk: in down markets the funds go down less than shares.
“Home offices” for wealthy families normally recommend a mix of one-third shares, one-third bonds and one-third property. (Home office is an expression used by investment managers to refer to wealthy families who pay a specialist to look after their investments and affairs.) This gives you an indication of how they allocate assets. With the help of ETF products and real estate investment trusts you too can achieve such an asset allocation. But I would suggest it’s not appropriate for most of you, particularly younger investors. In my experience, this allocation is too conservative (risk free) for anyone under 40.
In your younger years, you want more growth (and possibly more risk) for two reasons:
1. The shares have the potential to go up more in a low-interest rate world.
2. Some of the high-growth companies turn into the dividend champions that become some of the best long-term wealth creators.
20-40 years: low maintenance/high risk
For this age group, I suggest a selection of high growth and major index share exposure through ETFs predominantly – a few high-quality shares. The aim is to invest as early as possible and keep adding to the share portfolio while keeping costs down. There are a number of themes millennial investors and gen Z are attracted to that can be captured in ETFs: these include ethical, ESG, sustainable funds, domestic and global; technology themes like global robotics and artificial intelligence; and global cybersecurity. There are more listed in the US
with themes such as climate change and space captured in the ETFs, but you’ll need a US share account.
40-65 years: medium maintenance/high to medium risk
In these two decades your involvement and ability to invest will depend on your work and family life commitments. Normally as we age there’s more time to
commit to our share portfolio, but this is a very personal decision based on confidence, commitment to reading and education as well as enjoyment. For some of you it might become a vocation and a passion, but at all times assess your limitations and manage the risk.
As you age, you may want to consider increasing your exposure to shares, products or securities that provide stable and reliable income streams, or at least setting the stage for investing in shares that can deliver those dividend streams in the future. Adding good-quality real estate investment trusts (REITs) and maybe some exposure to corporate bond ETFs is a possibility as well. These also set the stage for securing a future income stream.
65 onwards: medium to high maintenance/low risk
This is probably the most challenging age demographic to comment on and will depend on whether you’re already in this age group or structuring the portfolio for when you reach it.
Someone in this age group asked me a couple of years back if they should sell their CBA shares. What a tough question, and one that could never be answered in isolation. If you have held bank shares like CBA for years you have a difficult decision to make when it comes to selling them, because they produce high franked income for you. You’re probably also sitting on a large capital gain. Try to avoid making a decision based on tax considerations. However, if you have made the tough decision to sell or at least partially sell such shares, ask yourself, can you afford to lose the income? Maybe it’s better to potentially sacrifice a future capital gain or capital to maintain the income.
If you’re still investing, think seriously about adding to these positions. Good portfolios manage the risk between shares. Try not to put too much in any one share, no matter how much you love it, and remember that even good companies go through tough times.