- Investment strategies
- Why invest in the stock market?
- Buy and hold or technical analysis? Why you need an investment plan
- Value investing and short selling in volatile markets
- Using technical analysis to support value investing
- Investing in the unexpected
- Franking credits, explained
- What is dividend stripping and is it a sensible strategy?
- Investing in quality IPOs
- How to invest in stocks that benefit from a moving Australian dollar
- Reasons to avoid bonds when interest rates are low
- How value investors use Skaffold
- Quality, growth and value = a winning strategy
- Know your investor type and boost your performance
- Technical + fundamental analysis = better buy and sell decisions
- Fundamental investing
- Value investing and the price earnings ratio
- Intrinsic valuation models and methodology
- Value investments or value traps?
- How to find value stocks in a bull market
- Find value investments in expanding markets
- Why capital raisings struggle to add investment value
- How to value an insurance company
- Top stocks
- 5 qualities of top stocks
- How to find stocks with a competitive advantage
- Why return on equity is the best measure of business performance
- Using cash flow to find value investments
- Finding high quality dividend stocks
- Debt is not always a dirty word
- Why Skaffold share investment software makes sense
- Using economic factors to uncover the best investment options
- How do experts find top stocks to invest in?
- Investing in global stocks
- How to invest in international shares on global stock markets
- Benefits of investing in international shares
Why invest in the stock market?
The stock market provides greater flexibility and liquidity than property. And dividends are a great bonus!
Investing in the stock market provides an investor’s portfolio with a balanced exposure to multiple asset classes.
Regardless of whether they’re more interested in capital growth or income, it’s critical that investors wanting to manage their portfolios with balanced exposure to asset classes, while maximising returns, aren’t scared off shares listed on the stock market due to fear of short-term volatility.
Even the most conservative investors, including retirees with little or no appetite for risk, could benefit from some exposure to listed shares, (otherwise known as equities) to offset the times when bank rates struggle to outperform inflation and they end up actually losing money.
In addition, listed shares – which provide an investor with a financial stake in a company – can offer investors greater flexibility and liquidity than other assets, especially property or bonds.
Equally important, the cost of buying shares is low and the capital requirement is minimal. You can buy a small parcel of shares with as little as $500, and then turn those shares back into cash by selling them on the Australian Securities Exchange (ASX) or other exchanges worldwide.
The single biggest reason for investing in the stock market is the potential for capital growth, combined with the power of compounding returns. Here’s a quick example:
An investment earning 10 per cent annually doubles every 7.2 years.
Let’s assume you put aside $50 a week and invest it into the share market every time you save $1,000.
If those shares earn 9 per cent a year, in 30 years you would have amassed $442,000 in wealth by investing only $78,000 of your own money.
It’s fair to assume that long-term returns in the 21st century are unlikely to be what they were in the 20th century. Nevertheless, assuming US investing guru Warren Buffett is right – and long-term annualised returns are a more modest 7 per cent – you could still double your money every 10 years.
Investing in shares is a long-term commitment. If you approach the stock market like it’s a casino, placing your bets on red or black, then your chance of a successful investing career is greatly diminished
If however you view the stock market as a place to pick top stocks, acquiring shares in businesses that are run by honest and high performing managers and implementing a sensible portfolio risk management strategy, the opportunity to build your wealth over the longer term is vastly improved.
This explains why 55 per cent of adult Australians – eight million people – own listed shares, either directly or through managed funds and superannuation.
Despite the innately volatile nature of stock markets, research suggests that shares repeatedly outperform other key asset classes over the long term.
Smart investing is rewarded with outperformance
Average returns for the last 18 years – 1995 to 2012 – saw listed Australian shares deliver in excess of 10 per cent, while cash and fixed interest delivered just over 5 per cent and 7 per cent respectively.
Different asset classes perform better at different times, depending on market conditions and economic cycles. However, the ‘average return’ reveals that listed Australian shares returned nearly twice the return of cash over the last 18 years.
While cash has never been the top performing asset class over the same time frame, there have been shorter periods when cash and bonds have outperformed shares. But over the longer haul, history shows that shares have delivered better returns, especially when tax benefits are factored in.
Adding to an investor’s after-tax position are dividend imputations, another tax benefit exclusive to shares. Assuming a listed company has already paid tax on its profits, as a shareholder you will receive a tax credit up to the corporate rate when these profits are distributed to you as dividends. However, there may be a shortfall if an investor’s personal tax rate is higher than the 30 per cent corporate tax rate.