Call us on 1300 794 893

Your Money

Q&A - Investments

I would like to invest some money in the stock market.

I often hear many people recommending investing in the top 100 companies as they are considered blue chip companies. Many people often use the S&P 100 to provide examples of compound interest (and use the following typical example: if I invested $ in S&P 100 in 1960 it would be worth $$$ now). My question is, if I invested in the top 100 companies say 20 years ago, or 10, or even 30 years ago, how many of those companies would still be in the top 100? For example, was Quintrex, HIH and Ansett in the top 100? Many people quote from the S&P 100 as a gauge of the top 100 companies, but isn’t the S&P 100 just an index? Can't companies currently trading on the stock exchange be moved in or out of the S&P 100 anytime? I have looked at the ASX website, but I can't find an answer.

I would appreciate your assistance in answering my question.

Thanks,
Damien
Port Macquarie, NSW
Dear Damien,

If you want to know the companies that where in the top 100 companies by market capitalisation 20 years ago then you could go to your local library, or better still, the State Library of NSW and search through their archives for news papers 10, 20 or 30 years ago and find the top 100 companies as listed in the business section of, say, the Sydney Morning Herald. This process is not as hard as you think and I would encourage you to give it a go (this was how we all use to have to look up information before the internet came along).

However, I think this is not the main answer to your question. In fact, you have raised a very interesting point about investing – the influence of past returns upon future returns. It is often said that past performance cannot be used to determine the future prospects for an investment. However, this may not be true in all cases. If you speak to a chartist, they will tell you they use the past movement of prices and other indicators to try and give clues about what is going to happen in the future (to what success seems to depend on the canniness and individual smarts of each chartist). Also, investors often look to the history of how well a company is run and operated to determine the likelihood of this continuing into the future. So, the most important part about using data to make assumptions about the future is testing how relevant the data is to the actual results. In mathematics, this is referred to as the correlation between the tested theory and the likelihood of the results providing a reliable outcome in real life.

In your case, you are assuming that if you pick a few companies in the top 100 this will increase your chances of avoiding a bad investment decision. But you have already spotted the weakness in your assumption – that is, just because a company is large enough to be in the top 100 companies by market capitalisation in Australia does not guarantee that the company will not make bad investment decisions that affect its future performance.

Damien, I would suggest you greatly expand your research when investing in direct shares past just picking companies in the top 100.

If you are considering taking a different investment approach and want to invest in a share index so you obtain the return of all the shares that make up the index, I would strongly recommend you speak to your stockbroker or financial adviser to discuss what is appropriate for you. You may be able to find further information by looking at ASIC’s web site (www.fido.gov.au) and also looking for managed funds such as those offered by Vanguard Australia or there are listed managed funds (that is, listed on the ASX) offered by such companies as iShares or State Street Global Advisers referred to as SPDRs.

 

 

For assistance in deciding what investments are best for your particular circumstances book a complimentary initial financial planning appointment with Switzer Financial Services today. 

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

Published on: Thursday, July 16, 2009

blog comments powered by Disqus
Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300