The most common thing we get asked about by people in their 20′s is the share market. With so many students doing business subjects all through high school and university, it is amazing that so few are taught the basics of how to start their own share portfolio. Unless you have an experienced friend, relative or a trusted family adviser to help you, it is hard to know where to begin. So here are some practical tips to help get you started on building a share portfolio.
Why buy shares?
Like all investing, the aim is to have your money working for you and growing for the future. In 10, 15 or even 20 years, this may be for taking a round the world trip, or renovating a house. If you really manage to build a portfolio well, it may go part way to replacing the income you normally have to work for. Buying a share means you become a part owner of that company.
How do I buy shares?
Shares are traded between 10am and 4pm on the Australian Stock Exchange (ASX). The easiest way to buy and sell is through an online broker like Commsec, Etrade, Bell Direct etc. Each of these will charge a fee every time you buy or sell a share (brokerage), so try to find one that offers low brokerage. Once you open an account, you will have to transfer money into that account before you can buy your first shares. When you buy or sell a share, the money is taken out (or deposited) in your account 3 days later.
How much do I need to start?
As a guide, we suggest a minimum of $6,000 to start building a share portfolio. You need to remember brokerage fees detract from your investments, so you should aim to purchase a minimum of $2,000 worth of shares in one go. You should really also plan to regularly add to your account, say $300-$500 per month. This will allow you to purchase shares in 2 or 3 new companies each year, or buy more shares in companies you already have. While people have different opinions on this, we suggest aiming to hold between 10-18 different shares in the future.
Which shares do I buy?
Unfortunately we don’t have a working crystal ball and cannot guarantee that shares will go up in value. In fact individual shares can change in value dramatically in a very short period of time. Rather than dreaming of making millions overnight, spend that energy researching good stable companies that are paying good dividends (money the company earns and gives out to shareholders). It’s worthwhile buying shares in different industries too. This helps reduce the risk of all of your shares going down at the same time. So in the case of someone starting with $6,000 you may look at buying $2,000 in a bank share, $2,000 in a mining share, and $2,000 in a consumer staples share.
What else should I know?
When building your share portfolio, there are three key tips to remember that will help you turn a small amount of money now into a significant investment for the future.
- Aim for quality blue chip shares and reinvest the dividends. Steer clear of advice from a friend whose uncle’s brother knows about a new technology that will change the world -it is almost a sure sign of a bad investment. Dividends should be used to purchase more shares. If you are gardening, you wouldn’t chop off new branches of a plant you want to grow. In the same way, when your shares pay you dividends, you should allow them to keep growing by reinvesting them.
- Contribute regularly.It sounds boring to just save regularly and build your portfolio over a period of time, but it is without a doubt the best way for a young person to build a portfolio. Consistently adding and reinvesting dividends averages out the cost of the shares, and reduces the risk of just buying at one time. The share market can have some pretty dramatic ups and downs, but buying shares over time smooths out the ride. Set an amount like $300-$500 per month and have it automatically transferred the day after you are paid. That way you won’t even notice it’s missing.
- When you need help, ask for it. Remember to take the time to speak with someone who has share market experience before launching into your first investment portfolio.
We would love to help set you on the right track and avoid rookie mistakes. Call Brendon Vade or David Heyworth if you would like to have a chat.