Investing in shares

It’s hard to understate just how powerful the share market is as a wealth creation vehicle.

Just $10,000 invested in 1991 would be worth over $160,000 today. I wish I could go back in time and make that investment many times over.

With a historical return of just over 8% per annum (roughly 4% dividends, 4% capital growth), the Australian Stock Market is a consistent wealth creator.

When you buy a stock, you are essentially buying a share in a business. As a part owner of the business, you are entitled to receive a proportion of the profits, which are generally paid as dividends. As the business makes more profit, the value of the business also increases.

The best thing about buying into businesses is that the business needs to generate a profit to survive. Therefore their intrinsic motivations are the same as yours - to receive a profit.

There are so many advantages to investing in stocks:

• They are liquid - which means easy to sell. Generally, you can put the order in, sell the shares within a few minutes and the money will be in your bank account in 3 days.

• The buying and selling costs are low.

• You don’t have to borrow money to purchase more stocks, just use the cash in your bank and you’re good to go.

• Stocks can be leveraged if you like staying awake all night.

• Franking credits. Franking credits are amazing!

However they come with one mega downside - stocks are volatile.

Stocks have a bad reputation for losing people money.

The Stockmarket has an image problem. It’s a rollercoaster of emotions.

We all know someone that has lost money in the market. Someone that has been burnt so badly that all they have to say about shares are negatives. Don’t forget though, volatility can be an advantage, allowing you to buy shares low and sell high.

Property vs shares:

It’s a debate that’s raged on for years.

Strong proponents of each investment vehicle push their point, each usually with their own vested interests.

Those pushing property are usually trying to sell a buyer’s agent service or a sell a property.

Those promoting shares are usually pushing their latest managed fund or trying to sell a stock trading course.

It’s interesting to note that property appears to have a positive sentiment as an investment vehicle, whereas shares always seem to have a negative connotation.

However if we dig deeper into these two assets classes, let’s look at the reality of the situation.

	Shares	Property
Easy to sell
Affordable to sell
Liquid
High yields/revenue
High capital growth
Volatile
Affordable
Can be geared
Can sell in parcels
Easy to diversify
Control over investment

When you look at investing in the stock market objectively, you’d would think that the sharemarket absolutely trumps property. And in a theoretical perspective, you’re correct.

The problem is that some people treat the sharemarket as though it's a roulette wheel. But that's not investing, that’s gambling.

The other problem is that people don’t spend the necessary time to find out how the market works. This leads to some pretty human reactions such as:

• When share prices decrease, many people sell their shares. Assuming the business is solid, the opposite should be happening - people should be buying more shares to take advantage of lower prices.

• When share prices increase, many people buy more share believing that the run of price growth will continue.

• People try to time the market, which is to buy low and sell high. Over time it’s been proven this is impossible to do consistently.

My personal opinion is this - both property and shares have the ability to make you very rich.

And both asset classes have the ability to send you broke.

So whichever you choose, make sure you do your research before investing.

If there is a particular asset class that you find more exciting and easier to learn about, it may be best to stick with this class.

At a fundamental level, I do believe that picking individual stocks is inherently more difficult and risky than investing in property. So if you are not that way inclined, be wary of investing in this asset class.

However, for those that want the benefits of the sharemarket, but aren’t interested in identifying individual stocks, and want to reduce their risk, I’d recommend you consider index investing instead. I can’t say enough good things about index investing.