TOP 10 GOLDEN RULES FOR INVESTING IN THE STOCKMARKET
While it’s natural to be nervous when financial markets are uncertain, it's important to stick to some basic investment rules to help keep current market fluctuations in perspective.
Here are TEN golden rules from Adrian Raftery to help you keep your investments on track.
- Market timing ie buy low, sell high – whilst it is impossible to predict the market lows, the greatest returns in sharemarket history are made when you can pick the share price at its lowest.
- Dollar cost averaging – don’t buy 100% of your portfolio on the one day. Spread it out over a number of months to avoid the problems associated with market volatility.
- Time in the market – if you bought when the sharemarket was higher, then an important maxim is to stay in the market and don’t panic. Generally in the market, what goes down will invariably go up over time.
- Don’t have all your eggs in one basket – the risk of losing all your money in the sharemarket actually reduces the more stocks you have via diversification. But don’t have more than say 15 stocks because the brokerage costs will start outweighing the marginal benefits.
- Pick quality stocks – when markets fall we often see that some great stocks have been reduced too much and are actual at a discounted price. I have seen too many people lose money on speculative stocks than make money on them.
- Fully franked shares – companies that pay fully franked dividends are provide a better after tax yield than those that pay unfranked because you get a credit of 30% company tax already paid. It means that those earning less than $80,000 effectively get dividends tax free.
- Borrowing – for a borrowing strategy to work, you need to get a return greater than the cost of the interest rate that you are paying. Otherwise you are falling further behind. Excellent strategy to consider in a rising market and the interest is tax deductible.
- Stick to your original investment plan - Understand what you’re trying to achieve and how long you’re prepared to invest, rather than focusing on what’s happening in the market. Keep in mind that the longer your investment timeframe, the more likely you’ll experience some form of short-term market volatility. Also understand how much risk you’re comfortable with and make sure it’s reflected in your investment plan – for example, investing in growth assets like shares can increase your long-term returns, but it’s likely you’ll experience greater short-term fluctuations than conservative assets like cash. Speak to your adviser to help you determine your tolerance to market movements.
- Don’t overreact to short-term market movements (ie don't panic) - Investment markets move in cycles, so it’s difficult to forecast when they’ll rise or fall. Moving your money in and out of the market during a downturn means you could potentially miss out on any positive ‘bounce’ gained in a strong market recovery. This view is supported by history. For instance, research on the Australian market since 1985 shows that the Australian share market returned an average of 28% in the year following a negative return.
- Get advice from a qualified source - If you’re really serious about something – whether it’s on a sporting field or in business – you generally seek avice. Building and managing your wealth shouldn’t be any different. A financial adviser can help you make informed investment decisions based on your needs, objectives and personal circumstances, while taking into account your attitude to risk. They help you decide what you want to achieve with your money and help you develop a strategy to meet them.
