- 25 September, 2019
A few simple questions for a would-be investor?
Realise your Dream is not a blog which provides investment advice for the retiree or future retiree.
No doubt our readers do have a firm interest in their superannuation and how it operates. On occasions they are also tempted to think that as investors they could do better.
So, I thought it would not hurt to provide a couple of simple rules to follow and questions to ask yourself if you do decide to take the plunge and become an active equity or share investor on the Australia Stock Exchange (ASX).
The first question you need to ask yourself is whether you have the time, energy and skills required to invest in the shares listed on the ASX. According to the ASX there are, - as at August 2019, 2,245 entities listed on the market valued in excess of $2,000,000,000,000 – this is trillion not billion. How do you decide which share to buy?
The next question you should ask yourself is what type of investor are you? Are you comfortable with the volatility of the market, will you be able to sleep comfortably at night if the market or the company you have invested in starts to drop in value?
A very common problem most inexperienced investors do have is that they will buy at the top of the market when all is going well and then sell at the bottom of the market when all is going bad. This action ensures that you will always suffer a loss. You do need to be able to hold your nerve when the market is not performing.
To help you hold your nerve, you need to remember that investing on the market is a long term strategy so to ensure you are not being forced to sell at the wrong time to pay a bill have a sufficient cash reserve to meet your ongoing needs and commitments. Do not invest all your funds into the market.
If I have not yet discouraged you of investing in the ASX by yourself without professional guidance here are a couple of other key points.
Do you understand the company you are investing in?
You can buy shares in a variety of industries, like mining, retail, banking and technology. You may have a clear understanding of the industry because you have worked in it. Or you have read about the industry in the financial media. You should understand the trends in that industry and how they compare to other industries. If you don't understand how that industry operates, then it will be difficult to work out whether you will get value for money in buying the shares.
Are you investing in a speculative high-risk venture?
Stock Exchange Listing Rules are quite onerous and the company must agree to follow these rules before it is allowed to list on the Stock Exchange. Nevertheless, the fact that a company has been accepted for listing does not mean that it is guaranteed to make a profit or that it will represent a good investment for you.
Many companies are speculative. Some companies will say in the prospectus that they propose to undertake high risk ventures which they anticipate will generate high returns, but which could also fail.
I should point out that when you invest in your superannuation you are of course investing indirectly through your fund into the ASX. The difference is that you are putting your hard earned funds into the hands of a team of experts who have a vast amount of experience and data at their fingertips to make decisions about when to invest, when to sell and into which companies your money should be invested.
These teams are also able invest in a manner which can provide some protection to your portfolio when the market does fall.
I have worked in the financial services industry for over 20 years and I do have firsthand experience with investing in the ASX and investing through my superannuation. I have made the decision that I do not have the time, expertise or the information required to invest on my own behalf.
Think carefully about your choice, and then talk to your financial adviser who can provide the necessary guidance and experience to ensure your superannuation and retirement plans are not subjected completely to the vagaries of the market both domestically and on an international scale.