Discover 4 essential investing rules
I’ve spent 37 years working in either journalism or stockbroking and the same follies keep coming up time and time again.
Rule 1: Diversify
The first rule is easy, and one that we hear about all the time, that is, diversify. All that stuff about eggs and baskets is absolutely true. When you only have a small amount to invest it’s tough splitting it half a dozen ways, but consider the alternative.
For instance there was the Queensland financial adviser who put his entire life savings into a Nigerian scam. This really happened. Aside from the fact that he should have been preaching diversification, he should have known enough about those Nigerian scams to give it the ten foot pole treatment.
Over time one of the best performing asset classes is shares, also known as equities. Even though they have periodic crashes, as we all know, they are easy to buy and sell and there are a variety of different share types, depending on your appetite.
There are growth shares, that don’t pay much of a dividend but whose prices rise solidly over time. There are dividend yielding shares, which work well for retirees because of the tax free benefit of franked dividends, and also consumer staples, often called defensives, because they hold up well in the bad times. Not forgetting new issues, known at IPOs or Initial Public Offerings, which is why the stock market came about in the first place: to raise money from the public for worthwhile ventures.
Rule 2: Go for fully franked dividends
The tax system in Australia encourages companies to pay local tax, and retirees to hold shares, by ruling that if a company has paid local tax, then the shareholders don’t have to pay tax again if they are in the retirement phase. That means that if you are getting a dividend yield of, say 6 per cent on some bank shares you own, and you are retired, it’s really the equivalent of around 8 per cent. In today’s low interest rate environment, that’s gold dust.
The most popular shares in Australia for this are the Big Four Banks and Telstra. But remember, if too many people pile in as buyers there’s a risk the share price will subsequently fall, so don’t just pay any price to buy them. Take advice.
- 6 insider tips for buying into an initial public offering
- 5 ways investing in the stock market can supercharge your savings
- Keep your super safe by watching these three policies closely
Don’t buy into something that may potentially financially stretch you just because rates are low
Rule 3: Don’t overstretch yourself on property
Don’t overstretch yourself on property when there’s a chance interest rates will rise. That’s where we are at the moment ... interest rates are at historic lows and that’s been exciting investors who have been looking much more closely at the monthly mortgage repayment they can afford, than the medium term outlook for property. Rates aren’t going to go up much any time soon, but when they do, so do mortgage repayments.
To be fair to the banks, they’ve pulled right back on lending to investors and have in recent years “stress tested” loans to make sure borrowers can survive a two per cent lift in rates. That’s eight 25 basis point rises in rates by the Reserve Bank. That simply won’t happen any time soon, but meantime don’t buy into anything that’s going to have you financially stretched just because rates are low.
Rule 4: Take control
Find out how the share market works and bear in mind that the costs of buying and selling shares are lower now than they have ever been in Australia, thanks to the rise of online trading. Focus initially on buying shares that won’t suddenly let you down but at the same time, you usually have to take a bit of risk to make a good return. Don’t go for anything that looks too good to be true, as it usually is, but a careful crack at a few new floats isn’t the worst way to find out how the market operates.
See which online advice and market access services are available and sign up to them. Some, like OnMarket’s app, are free, while others provide several different levels of information, some free and others by subscription.
And remember, see Rule one.