Are you keen to grow your wealth but afraid of the share market? This one is for you.
For many first-time investors, the idea of investing in the share market can be fraught with danger. Often the first thing that comes to mind is every negative news headline, starting with the GFC (or for those of us old enough to remember, the Dot Com bubble) and this isn’t helped by media speculating as to when the next crash might be. This one-sided way of reporting the news paints the picture that the share market is all doom and gloom and about as safe as betting your life savings at the casino.
While share markets do fluctuate on a daily basis, it becomes easier to take the plunge when you have a better understanding of how share markets work and what you can do to reduce your investment risk.
Why do share prices change so often?
To put it simply, share prices change so often because they are bought and sold almost every day, with the demand for any particular share will changing due to a wide range of factors.
Participating in the share market are two types of shareholders - investors and speculators.
Investors are typically in it for the long haul. They are focused on purchasing quality investments and minimising their risk and costs along the way. Speculators on the other hand have a shorter timeframe and tend to be focused on trying to beat the market and making a quick win. This means that they are very quick to react and are often prone to taking high risk strategies. It is the interaction between these two cohorts that affects supply and demand (and in turn prices) of shares on any given day.
Consider for a moment, your local fruit and veg market. Just like you can buy your fruit and veg at a local market, so too, you can buy and sell shares on almost a daily basis. You may find that fruit and veg is more expensive on the first day that the markets open, but you can get a better price for them at the end of the day or on a Sunday afternoon depending on how many customers are around and how much stock is left over. Just as the price of fruit and veg changes during the course of the day or week, so too do the prices of shares.
It is for this reason that many people believe that property is a safer investment than shares because property prices don’t fluctuate as much. While that may be true, it is an unfair comparison to make because your home isn’t up for sale every day of the year. If your home was auctioned every day, you would find that even the value of your home would change daily. Factors like the weather, day of the week and other auctions taking place at the same time could mean that on any given day you may attract more or less buyers to the auction. The less buyers, the lower the price. The more buyers, the higher the price. The share market is no different in that regard.
As you can see, once you begin to understand the inner workings of the stock exchange, it becomes easier to appreciate that the price of a share on any given day isn’t necessarily a reflection of how well the underlying business is performing and whether or not it makes a good investment. It is for this reason that true investors play the long game. They understand that in the short-term share prices will fluctuate regularly, but that in the long-term history has shown those values do tend to recover and grow just as the businesses themselves continue to grow. Which is to say, the key to successful investing is to ignore the short-term noise and take a long-term view.
How to play the long game
Given that share prices are unpredictable in the short term, it can be difficult to know when to invest and what to invest in. The fear of losing money or getting the timing wrong, can be so overwhelming it can paralyse you from taking any action.
The good news is that there are strategies at your disposal that can help you reduce the pressure of getting it right and minimise your risk in the process:
Dollar cost averaging
This means that rather than saving up your money and investing it all in one hit, you take the approach of investing smaller amounts more regularly (for example monthly or quarterly instead of yearly). Doing so means that you will be buying shares at different price points (sometimes high, sometimes low) and over time these will balance each other or average out, thereby reducing the timing risk.
Not every investment will perform as well as others, and without the benefit of hindsight it is impossible the pick the best performer. The easiest way to reduce your risk of ‘getting it wrong’ is by spreading your investment across different companies, sectors and even countries. As the old saying goes – don’t put all your eggs in the one basket.
Invest in different asset classes
An asset class is just a fancy way of saying ‘groups of investments that behave in the same way’. Property, shares, cash, bonds, and alternative investments are examples of different asset classes. Spreading your investment across these different groups of investments is another element of diversification and will allow you to smooth out your returns.
Getting started with investing can feel daunting and nerve wrecking, but it doesn’t have to be that way. As financial advisers it is our job to help you filter out the noise and develop an investment strategy that is right for you – based on your own goals, aspirations and investment preferences. We are there to help you address your fears head on and make sure you not only understand your investment options but feel confident and in control of your financial strategy. To get started, just click here to book an obligation free consultation.
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What you need to know
This information is provided and produced by Serendipity Wealth Advisors. The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.