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Do your homework on share trading

Share trading can be a complicated process and that’s why it’s important to do as much research as possible before diving in.

While it can be a great way to growing your wealth, it also opens you up to risk and you can lose as well.

The Global Financial Crisis would have concerned a lot of traders as their shares plummeted in a matter of a few weeks.

Peter Switzer, founder of Switzer Financial Services, says the formula for wise investing is “quality, time and diversification”.

“You select great assets, you hold over time and you don’t put all of your eggs in one basket,” he says.

Top 20

He says, for example, the Australian Financial Review recently put the spotlight on the top 20 stocks. That doesn’t mean all the companies on the list are blue chips, but you could argue they have a fair bit of quality about them. Taken together, you only have five per cent exposure to any one company.

He says five years ago the top 20 stocks accounted for a 60 per cent weighting for the S&P/ASX 200 and last year recorded a 33 per cent return, while the S&P/ASX 200 rose 31 per cent. Going back five years, the index put on 20 per cent, and that’s including the crash of 2007 to 2009. The top 20 stocks rose 37 per cent, which is a 17 per cent gap over the index.

“This is a very good guide to creating your portfolio with some investors creating their own top 20 based on the companies that have the best track record for paying dividends,” he says adding that the only problem with this is you can lack diversification, “which could punish you for capital gain”.

Switzer says if you want a safe, rock solid top 20 to 50 stock portfolio, you can speak with a stockbroker. A stockbroker can listen to demands and create a portfolio for you.

A broker often charges one per cent to create a portfolio and one per cent to buy the shares, so if you invest $100,000, it could cost you $2000.

He also says you can just buy a portfolio and buy the shares yourself.

Another method is to invest in an exchange traded funds (ETF).

“Once you have a good group of assets, you can just hold them and occasionally review how the companies are going. For novice investors, I do like the hold great companies strategy,” he says.

Rule of 72
Switzer also says to remember the rule of 72.

“The rule of 72 captures the beauty of time and the compound interest of good quality shares,” he says. “Imagine if your portfolio averages 12 per cent. If you divide this into the number 72 you find your money doubles every six years.”

While there will be crashes and booms that distort the averaging number along the way, over 20 years, the ups and downs will move back to the average.

You can also visit a financial planner such as Switzer Financial Services, to get advice on the most appropriate way to invest your money. The key is, before you make any moves, do lot of homework.

That will put you ahead of the game if you’re considering getting into share trading.

For advice you can trust, book a complimentary first appointment with Switzer Financial Services today.

Published on: Tuesday, February 16, 2010

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