Noel Whittaker writes exclusive weekly blog updates for the Ban Tacs Group, with IN8 Business Advisory, a member of that group. Here, he talks why investing in shares is a long-term investment.
Investing in shares has played a major part in my life for more than 50 years, and I have long believed they are the best long-term investment anybody could have. But this is a view not shared by everybody – time and again I have heard statements like “I invested in shares once and lost the lot”, “aren’t shares high risk?” or “I guess it’s okay having a flutter on the stock market if you don’t spend more than you can afford to lose.”
These views were reinforced by the extraordinary events of last week, when a horde of day traders, acting on information from social media site WallStreetBets, joined forces to do battle with American hedge funds who had shorted stocks like GameStop who had shot up 8720% in just two months.
Apparently much of the trading was done on the new market trading app Robinhood, with funds provided by stimulus checks. The craziness even spread to a small Australian mining company who shares the same stock market code as GameStop. It’s price shot up by 50% last Thursday as 18 million shares were bought by day traders who mistook it for the American GameStop.
Let’s get real – this is not investing in shares, it’s simply gambling. And the fact that much of the money came from stimulus checks, is an indication of the type of people who are now piling into the latest craze.
The antics of the last few days have not diminished my enthusiasm for shares, but this may be a good time to reiterate some share market basics. First, you need to decide whether you are a trader who buys today in the hope of reselling at a profit in a very short time, or whether you are an investor who looks for a quality share they could hold for the long-term.
When you invest in shares you are acquiring a share in a business, and if that business goes well you should do well too. This is why experienced investors look for a strong business, with good management, relatively small debt, and a history of performing well. The reward for the investor is regular dividends, and the ability to participate in the growth of the company as time passes. It is the antithesis of share trading.
Anybody investing in shares should take a long-term view and be prepared to hold their portfolio when the market goes through a normal volatile phase. Furthermore, if they are retired, they should keep at least 3 to 5 years planned expenditure in cash form so they are never forced to liquidate shares at the worst possible time.
Many would-be investors in shares just don’t know where to start. For them, a simple strategy is to buy an index fund such as VAS or STW. The ongoing fees are minuscule, you could start with as little as $100, and because they are listed on the stock market you can buy and sell at short notice. But they are not meant for traders – they are meant for people who want of have an interest in the share market yet be unconcerned about day-to-day fluctuations.
To get an idea of how the index is performed just have a play with the Stock Market Calculator on my website www.noelwhittaker.com.au . Here you can enter a notional sum, pick a starting finishing date of your choosing and see how the investment would have performed if it matched the All Ordinaries Accumulation Index. For example, an investment of $100,000 in January 2011 were now be worth $214,000. That’s a gain of 8.82% per annum for 10 years. I reckon that’s a better bet than fighting it out with day traders.
Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au
8 Feb 2021
