Shares and the Market

When you invest in shares you are buying a piece of a company and by doing so you are aligning your interests with the company’s future growth and earnings potential.

In effect, you could take part in the success of companies like Telstra, Westpac and BHP and actively participate in the economy.

Share investments offer two different types of returns – capital growth and income.

Capital growth occurs when the value of your shares increase over time and is realised when you sell the shares. Income comes in the form of dividends paid by the companies you invested in.

Different investors place different importance on growth and income. In general, younger investors and those still working give priority to medium to long-term growth, whereas retired investors tend to look for income to help fund their retirement lifestyle.

Most share portfolios are built to offer a mix of both growth and income. Where things get more complicated is in choosing the right companies to invest in at the right price.

Fear and loathing

Over recent years share ownership has decreased from 43% in 2010 to 38% in 2012.

Much of that reduction was a function of investment fear created by the Global Financial Crisis and a reweighting of asset allocations because investor had concluded their exposure to shares was too high.

Despite all the fear in markets since 2008, investors with sensible allocations to sharemarkets and disciplined strategies have made strong returns. Recently, legendary American Investor Warren Buffet banked US$10 billion from his investment in Goldman Sachs, General Electric and Bank of America during the Global Financial Crisis.

Many of us don’t have the financial strength of Warren Buffett to cut preferential deals, but we do have the ability to apply some of his strategies to our own investments. Buffet once said “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”

Shartru Wealth Management employs investment strategies that are designed to reduce costs, timing risks and excitement. Because we know that timing is almost impossible to get right and is often wrong. Excitement leads to irrational exuberance, chronic fear to unnecessary costs, all of which lead to a transfer of your wealth to the unworthy.

Performance and tax

Over the 10-year period to December 2012 Australian shares returned 8.9%. On the lowest marginal rate, this equates to an after-tax result of 9.2%, while calculated on the highest marginal rate the result was 6.9%. Because Australian companies generally pay dividends with a franking credit attached, this reduces the tax payable in the hands of the investor. As a result shares returned an investor on a lower tax rate a higher return, that an investor on a higher tax rate.

Shares and the Market

For the same timeframe Australian residential investment property returned 6.5%. After tax on the lowest marginal tax rate this equated to 5.9% while on the basis of the highest marginal tax rate this was 4.6%.

On a 20-year basis however, while Australian shares returned 9.8%, residential investment property returned 9.5%. At the lowest marginal tax rate this works out at 10% for shares and 8.6% for residential investment property. After tax at the highest marginal tax rate the returns are 7.9% and 6.8% respectively.

The importance of going global

Australia makes up only 3% of the global sharemarket and it is dominated by the resources and  financials industries. If you’re looking for diversification and more growth opportunities for your portfolio, it’s important to consider global shares.

While we tend to hear a lot of news about world markets, there are many great investment opportunities in global sharemarkets. Some of the largest, most innovative and profitable companies originate from the United States, Europe, Asia and emerging economies. Just think about the brands you use every day – Royal Dutch Shell, Hyundai, Toyota and Coca-Cola to name a few.

Hoopla, theories and white man magic

Despite all the hoopla, theories and white man magic that is featured on the 6pm news, magazines, newspapers and radio, the reality is that picking shares is a tough game and the more times you roll the dice the less successful you are likely to become.

We assist our clients apply some well warn strategies to deliver them outcomes that are consistent with their investment goals. They include:

  1. Determining the investment goals.
  2. Diversification– constructing balanced portfolio’s that take into account the investors investment goals that strikes a balance shares and cash and fixed interest.
  3. Managing costs– we seek to capture market returns at low cost and then add value where we can identify value add opportunities.
  4. Dollar cost averaging – because no one can time the market, so putting money into the market at regular intervals, implies investing some money when stocks are high, but also ensures some buying at market bottoms, because more shares are bought when prices are low, thus lowering average costs.
  5. Regular rebalancing– by applying regular rebalancing to your portfolio you realise asset class gains and invest them in underperforming asset classes. While rebalancing does not always provide higher returns, it always gives a lower risk or volatility level.

* Long-term Investing Report, Russell Investments, Australian Securities Exchange 2013