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I’m still in term deposits. Have I missed the boat with shares?

Paul Rickard
Thursday, June 27, 2019

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With the Great Financial Crisis (GFC) of 2008/09 seeming not that long ago and given all the scary stories that the mainstream media has reported over the last decade – from debt and deficit crises through to the China bubble and fake cities and a local housing market implosion – it’s not surprising that some investors have been reluctant to be share investors. They have preferred the safety of term deposits and other fixed income investments but as interest rates head down to a big figure beginning with a ‘1’ or a ‘0’, share market yields of 4% to 5% or even higher are looking pretty attractive. And with the Aussie share market moving close to all-time highs, they are asking themselves ”have I missed the boat”?

Nothing goes up for ever, or in the one direction. So is it too late to invest now? And what do you invest in?

Firstly, the big picture.

The chart from the Reserve Bank below shows the performance of the Australian, USA and world share markets on a logarithmic scale over the last 25 years from December 1994. These are accumulation indices, which consider both share price and dividend returns. The standout conclusion – share markets provide fantastic returns over the long term.

The scary part is the market crashes – 1987, 2000/2001 and 2007/2008 – when the market dropped by 20% to 30%. But there are two points to note. Firstly, the market rebounds quickly. Secondly, it takes out its previous high, which is exactly what we are seeing in Australia at the moment as it retests the high of 2007 achieved about nine months before the GFC started.

The chart also confirms the old share market adage that goes “it’s time in the market rather than timing” that counts. Few fund managers or share market professionals think that they can consistently buy at the bottom or sell at the top but no one wants to do it the other way around.

My answer to the question: “is it too late?” is “No”. It’s never too late for a long-term investor to buy shares. If you need access to your capital in the short term and can’t stand a 25% fall in the market – which as surely as night follows day, will happen at some time in the future -  then it probably is a little late. We are 10 years into a bull market, and while there is no rule that says that it can’t go on for another 10 years, history says that this is less likely. On the flipside, the question to ask is: “can I afford not to invest in the share market?”

So how do you invest without taking too much risk (or at least to cut out most of the specific company  risk)? There are two ways to do this – invest on the ASX in a fund with a professional investment manager, or establish a diversified portfolio of shares, at least 5 stocks and preferably 10 to 15.

The easiest way to invest is to buy an exchange traded fund (ETF). These are passively managed funds listed on the ASX that track broad market indices such as the S&P/ASX 200 (an index comprising the top 200 companies). They aim to replicate the performance of the underlying index by investing exactly in accordance with construct of that index. If the underlying index goes up by 2%, the ETF should go up by 2%, and if the index falls by 2%, the ETF should also go down by 2%. Because they are almost on “auto-pilot”, ETFs of this nature charge very low management fees, sometimes as low as 0.10% pa. Vanguard’s VAS (ASX :VAS), iShares IOZ (ASX:IOZ) and State Street’s STW (ASX:STW) are some of the leading ETFs.

An alternative to an index tracking ETF is one of the broad-based listed investment companies (LICs), such as Australian Foundation Investment Company (ASX:AFI), Argo Investments (ASX:ARG) or Milton Corporation (ASX:MLT). Actively managed, these LICs invest in a broad portfolio of stocks and aim to provide reliable returns with a bias towards higher dividends. Some have been in operation for almost 50 years and because of their size, also charge low management fees. Over the long term, their performance has been very strong, but in the last couple of years, they have underperformed the market a touch. The good news is that they are now trading at a small discount to their underlying net tangible asset (NTA) value.

A newer subset of the ETF style are actively managed quoted funds. Two aiming to provide higher income returns while broadly matching the overall market are the eInvest Income Generator (ASX:EIGA) or the Switzer Dividend Growth Stock (ASX: SWTZ).

If you are considering individual stocks, you need to consider at least 5 stocks and more likely 10 to 15 stocks to establish a diversified portfolio. The stocks should come from across the industry sectors (you don’t want all banks or all mining companies), and be roughly weighted according to the importance of that sector. The table below shows the main industry sectors, their relative weightings, and the largest stocks by market capitalisation in each sector.

As at 31 May 2019. Source: S&P Dow Jones

A first timer might want to start with some companies that they are familiar with or use their services, and then build out the portfolio over time as confidence and knowledge grows. Get to know the companies, how the market values different companies and how it trades. A starting portfolio of 5 stocks could include your bank, your supermarket chain, your telco, a big miner such as BHP and healthcare leader CSL.

There are many different ways to get started and it’s not too late to get started. But you will need to be prepared for a bumpy ride, because that’s what shares do – they go up, they go down, and then go back up again.

Published: Thursday, June 27, 2019

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