Investing into shares, how risky is it?

Investing into shares - how risky is it

Investing into shares, how risky is it?

Australians generally have a love / hate relationship with Australian shares. On one hand we love them because they provide a relatively reliable level of income, with beloved franking credits, that are a very special thing of the Australian tax system.

But at the same time, we hate share, due to their volatility.

As humans, we are drawn to immediate results, such as a very fast market reaction and increase in share prices, but we hate when the reaction is to our disadvantage, meaning shares are dropping in value.

But, you see, one cannot exist without the other, for shares to go up in value, someone had to drop them and sell them to you at a reduced price, and if the economy is right, and enough shares get sold at the bottom price, eventually the price just have to go up, and if you happen to be a buyer for the stock, you are a winner and you make a profit.

During the low interest rate environment, we’ve had for years now, it was easy to make a profit with shares, even just with the level of reliable income they pay. Why would you have kept any money in a term deposit that was paying close to nothing with CBA or NAB or Bendigo Bank, where it was enough to buy shares of whichever bank, and your level of income jumped to between 5-9% per annum, plus franking credits, which we all love so much.

So, I think by now, you have gathered, that I am a big supporter and an investor myself in Aussie Shares, however, as good as they sound on a surface, you really need to do a bit of a homework before you commit any of your money to invest into any shares.

 “One of the funny things about the stock market is that every time one person buys, another sells,
and both think they are astute”.

I love this saying, because it virtually confirms that we, humans, can justify any of our decisions, even if, or maybe I should say, especially if they are our mistakes.

So why I love investing into shares, especially Australian Shares?

Aussie shares are very special and a different kind that you have in Europe, UK or the USA.

Our Aussie shares, especially top 50, as much as the underlying asset can sometimes be a bit volatile, meaning the actual share price goes up and down, the level of income for years has been very reliable. We had a bit of disruption due Covid and now rising interest rates, which impacted companies cashflow, but in general, the level of income has been for years very reliable and extremally tax effective for many retirees.

The problem appears that some people get spooked with that volatility very fast, and see drop in share price, together with all the doom and gloom you hear or read online and sell high quality shares at the most unfortunate time.

And this could be a direct shareholding or through a superannuation fund, or a pension fund. But in reality, what is happening now, is that by keeping all funds in cash, there is no capital growth and no income being derived.

So, my questions is this, and it is exactly what I say to every single person I speak to:

If you own a house that is worth $1mil, would you sell it to someone, just because he offers $800,000? Please answer that questions before I continue? Well, would you?

I bet you wouldn’t. But why not? Here is $800,000 on the table, how do you know that the next person would pay your price? or maybe you don’t even need to sell this property at all.

The same philosophy lies behind shares. Why would you sell good quality Australian companies, just because their share price dropped. This is still the same bank, or the same BHP or Wesfarmers or the same Woollies.

It is just that today someone is offering a lower price, but wait few days, few weeks and the price will be what you want or maybe even higher.

The funny thing is, that when that price goes higher, this is when most people do not want to sell, because maybe that share price will go even higher and if I sell, I will miss out.

So in both cases, either selling at the reduced price or not selling at high price, it is the issue of our internal greed and a fear of missing out. Nothing wrong with this, it is a human nature, but once you understand it and accept, rather than denying it, your investing in shares can be so much easier, with less fear and more contentment.

Now please remember, Aussie shares, as good as they are, they constitute only about 5% of the world market, so you need exposure to other markets as well. So we will talk about other markets in other videos.

When investing into shares, diversification is the key. You have to invest into a range of shares from different industries, as they all perform in a different cycle. And investing into 4 banks is not diversification. When banks go down, they all go down more or less together at the very similar pace.

So what sectors can you invest into?

There are 11 stock market sectors:

1. Healthcare Sector
2. Materials Sector
3. Real Estate Sector
4. Consumer Staples Sector
5. Consumer Discretionary Sector
6. Utilities Sector
7. Energy Sector
8. Industrials Sector
9. Consumer Services Sector
10. Financials Sector
11. Technology Sector

Each of the listed sectors has specific industries, and then you can choose the best companies in each industry and then in each sector.

Why diversification between them is so very important? It is because it is virtually impossible for all sectors to be dropping or growing at the same time, and at the same pace. Therefore, whether you are after good solid level of income or capital growth, that diversification is a key to reduce volatility of the underlying value of assets or income.

I hope you found this introduction to share investing interesting. If you need any assistance in building your own share portfolio, feel free to book a meeting via the website, so we can chat to see what type of the portfolio would meet your goals and your needs.

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement

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