November 07, 2018 The beginner’s guide to the sharemarket
For a novice, the sharemarket can be like landing in Shanghai and not being able to speak Mandarin. As with any language, though, start learning the foundations, and all of a sudden things start to fall into place.
Ultimately, the sharemarket can be as complex as you want to make it. It really depends on what your financial goals are and whether you want to learn everything and manage it all yourself, or get a professional to manage it all for you.
If you’re more the latter, I’d argue that it’s still worth getting your head around the basics. That way, when you do engage, say, a financial adviser, for example, at least you’ll have a lay understanding of what they’re talking about and, importantly, what you’re investing in. Any adviser worth their salt should talk you through all the intricacies, anyway. If they don’t, run a mile.
I’ll be running a series of articles on investing over the coming weeks, but, first, I just wanted to share the five key things I believe you should consider before putting money into the sharemarket…
1. Understand the basics
Your first port of call should be to jump onto Money Smart and get your head around the basics of buying and selling shares. I could have dedicated an entire blog to this alone, but Money Smart covers it really well. Even if you never buy or sell shares yourself, this will give you a bit of a guide as to the mechanics of the sharemarket and how it works.
2. Temper your expectations
My first golden rule is that, if you are going to invest, invest for at least five years. Ideally more. Investments need time to develop – don’t get your hopes up thinking your portfolio’s going to explode and make massive gains in the short term. Also, your initial investment could actually go down in the short term, and you need to be comfortable with that. Again, it’s all about the medium to long game. Learning the art of patience is key to making money.
3. Seek expert advice
You’d expect me to say this, but I can’t stress this one enough. Without good advice, you run the risk of losing precious capital. Whether it’s us or someone else, engage a partner who is an expert and can help you set up a sound investment strategy. Same goes if you’re thinking of going DIY. Speaking from experience many moons ago, it just might help you avoid making costly mistakes, particularly over the short term. If you are considering doing everything yourself, we mentor and support a number of members who are actively managing their own portfolios, just so you’re aware.
4. Know your risk appetite
This will ultimately depend on your personality. It all comes down to having a realistic understanding of your ability and willingness to stomach large swings in the value of your investment. While I’ll always err on the side of investing over the long term anyway, if you’re the type of person who loses sleep over money, I’d avoid taking on too much risk if you’re a novice, as the probability of you panicking during potential short-term volatility, selling at the wrong time and losing money is quite high.
5. Spread your risk
I’ll elaborate more in the coming blogs, but diversification is crucial when it comes to investing. Here’s an example. Let’s say a sharemarket-savvy friend gets in your ear about a company they believe is going to shoot up in price. Yes, you could buy shares in a single company in the hope that it’s going to fly in the short term, but what happens if it doesn’t and goes south? If you’re new to investing, a diversified fund made up of, say, 120 companies, for example, might be a better place to start. To take that even further, you also might want to split your money into low-, medium- and high-risk funds, if you want to hedge your bets somewhere in the middle. In other words, spread your risk and don’t put your eggs in one basket. You’ll sleep much more soundly, and it’ll help you win out in the long run.
If there’s anything that doesn’t make sense or you’re thinking about dipping your toe into investing in the sharemarket and need a soundboard, give me a shout – always happy chat.
In my next blog, I’ll be talking through the power of compounding returns.
Disclaimer: all information contained within this article is of a general nature. It does not take into consideration your personal financial circumstances. Please consult a professional financial adviser (just like us 🙂 ) when making a financial decision.