Here is a topic that I write on with a great deal of trepidation! I do not claim to be an expert. In fact, I am rather flabbergasted and confused by the fact that a company can have continual price corrections in one day with no real change to the physical company… strange, but true… This is the share trading world.
The reason, stimuli, sledgehammer (take your pick) for this article is my own recent wins and losses on the share market. One of my initial investments went from $0.13 to $0.88 and turned $3,000 into close to $17,000. Sounds great, right? I certainly thought so and as a result, I became really cocky, thinking I was savvy with the share market. However, right around the time one investment peaked a lot of other companies dropped in value. The ASX recorder had a really bad day and I was left feeling sick at the amount of money I lost in one single day. Luckily, I invested only as much money as I was willing to lose (see Shoestring’s rule #1 below). But still, the thought of all those pairs of shoes I would never be able to provide a loving home for. Even now it hurts!
In general, when it comes to investing, I learned the importance of understanding the different styles of investing. In general, I believe it is a spectrum with the slow and steady conservative ‘tortoise’ investor on one end and the fast and loose daredevil investor on the other…
Slow and steady wins…. what?
Investing in a conservative portfolio is similar to betting on the turtle, slow and steady wins the race. Many older people place their money in funds with diversified investments to minimize the risk (and conversely the chance of a huge payoff) and instead create a steadier, more reliable solid income stream. The nature of a diversified portfolio is to spread the losses and gains over a greater number of asset bases. For example, if I purchase one type of share and invest $5,000 in that share, I am placing my complete investment in that share. This is great if the share performs well, but not so, if – as in my case – the share performs poorly. A diversified share portfolio may be spread over two hundred different types of shares, so if one performs poorly, it has little impact on the performance of your dollar as a whole. A conservative share portfolio will often take in more blue chip companies (for example, banks or Microsoft). A company is coined blue chip as they have a history of performing well and have solid management and infrastructure.
Nicht kommt als….what?
For some share investors, it is all about the rush and the risk. For these Evil Knievel of the money making world, an aggressive portfolio is what it is all about. These are the ones that spout ‘we can create 20% growth in your shares!’ I was once told, ‘nicht kommt als nichts’, effectively, ‘nothing comes from nothing’. Aggressive portfolios often place their money in speculative short term investments, sometimes overseas. When it works out, the rewards are great, but there is always a risk. Investing in a building site in Asia can easily turn sour and the returns are written off. However, on the flip side, when a risk does pay off, the investment adrenaline junkie makes their fortune and retires to take up base jumping!
Now, before you rush off to play the market, keep in mind my three basic principles for share investment:
1) Only invest the amount of money you can afford to lose – There are no guarantees with shares, regardless of what you are told. There are methods and approaches, like diversified portfolios or insuring your purchases for an agreed amount. However, even conservative blue chip investments have posted losses. As a friend of mine once stated ‘the nature of the share market is that where someone loses another gains’.
2) When/if choosing a diversified share portfolio chose one that matches your risk profile – If you are using a financial advisor, they should ensure you complete a risk profile to assist in choosing how much risk you wish to have in your investments. As I said above, a high risk portfolio might yield a higher annual profit, but there is a greater chance of losing money. A more conservative portfolio, while not generally exposed to the same level of risk, usually has less potential capital increase.
3) Do not spend all your profits – Share trading is a great way of making money. If (or for the optimists out there, when) you happen to have made a bit, remember not to spend it all. When you make a profit in any investment, you are subject to capital gains. This tax is only applicable to the profit, not the initial investment, so keep track of purchase and sale statements.
Shoestring’s Takeaway Tip: The share market’s basic momentum is fuelled in part by the capitalist society we live in. One of the fundamentals for this momentum is growth. Unless the whole modern, western world falls apart, this natural growth should continue, taking an investor’s dollars further. However, enter at your own risk! Remember to only invest with the level of risk you can handle, and always bear in mind that shoes may be a viable alternative… One (i.e. me) could easily argue for placing money in tangible shoes as opposed to losing it on the share market.
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Disclaimer: While we hope you enjoy Shoestring’s column, please note it should not be relied upon in lieu of seeking professional investment advice relevant to your circumstances.
