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The eight-point plan for creating your share portfolio
Planning prevents piss-poor performance. This statement was the catchcry for my son’s school rowing team, and it’s good general advice. Here is a go-to list of eight points to consider when starting out in share investing. The same list can be used each year as a check to make sure you’re on track.
The eight-point plan for creating your share portfolio
Planning prevents piss-poor performance. This statement was the catchcry for my son’s school rowing team, and it’s good general advice. Here is a go-to list of eight points to consider when starting out in share investing. The same list can be used each year as a check to make sure you’re on track.
1. Know yourself
This requires a good, honest look at yourself. Have you ever in your life bitten off more than you could chew? I know I have. So to plan your best portfolio, start by seeing where you fit on this checklist:
- How much time can you commit? A lot (weekly), some (monthly) or very little (annually)?
- Is your knowledge base low, medium or high?
- How much experience do you have?
Your answers to these questions are very personal and will help to determine whether you fit into one of the three portfolio groups – low, medium or high maintenance – no matter what age you are.
2. Have clear goals
We all want to make money, but it’s useful to have a benchmark, whether you invest in shares directly or indirectly through passive (ETFs) or managed funds (LITs and LICs). A benchmark isn’t a number you must or will achieve but rather a goalpost to keep in sight. In our low-return world, it’s unrealistic to expect the historical total returns (capital and income) of 13 per cent pa. A goal of around 7 is more realistic. An average 7 per cent pa return with income reinvested will more than double your money in 10 years.
You also need a savings and investment plan: decide how much you want to invest at the start, what’s affordable and whether you can continue to make contributions over time.
3. Prepare to take risks
This is probably the most challenging concept for new and even some seasoned investors to understand. On a scale, shares are riskier than bonds but a lot less risky than trading commodities or currencies. Small companies with less liquidity are more risky than larger companies with higher liquidity. Resource and gold (cyclical) shares are possibly more risky than defensive shares – such as healthcare companies and consumer discretionary stocks like Woolworths. It depends on where the companies generate their earnings.
Most of us don’t properly understand risk until we have suffered a real and material loss. Experience is the best teacher for understanding risk. Your risk will also vary depending on your age.
4. Exercise control
Some investors have a greater predilection for trading, punting or basically gambling. That is, they want to make a quick profit. Of course, this is possible sometimes but not likely or probable all the time. Very few people can successfully trade their way to wealth. Wealth creation comes through investment in good quality companies (like CSL) over time. With any portfolio you adopt, you need to ensure you spread your cash across a few shares or funds. This is known as “not placing all your eggs in one basket”.
5. Do regular reviews
Depending on how involved you are with your portfolio, a review can be done quarterly, six-monthly or annually. If you’re not trading, it’s preferable not to be swept up into the daily noise of the markets and volatility (shares prices moving up and down). The reviews can include:
- Are my investment choices working? If not, why not?
- Should I take some profits on some shares?
- Should I sell any shares or funds?
- Are there emerging secular market trends (long-term growth in sectors like IT or Software-as-a-Service) I should seek exposure to?
Be careful of investing in too many small shares during a bull market. Most shares rise in a bull market; it’s only when a bear market arrives that you can see which of your emperors (your small shares) have no clothes and are not as good as you thought they were.
6. Stick to the 80:20 rule
This is relevant to any share investing and it refers to the basic concept that 80 per cent of your performance (profit) will be achieved from 20 per cent of the shares you own. For example, if you have 10 shares in your portfolio, more likely than not, 20 per cent or two of those shares will account for 80 per cent of the increase in the value of the portfolio. The sharemarket also typically goes up eight out of 10 years, so unless it’s a dire situation or you’re nearing retirement, hang on in there. Optimism outweighs pessimism in share investing.
7. Use reporting systems
Come tax time, you’ll benefit from having in place efficient reporting systems to log the dividend income and change in the value from one year to the next.
8. Be mindful of costs
I think it’s a reasonable assumption that most of us haven’t really come to grips with the costs of share investing and the best ways to minimise them. This is relevant in a low-interest-rate world where costs can have an extremely bad impact on the money you make in the future.
If you’ve already invested, you may need some courage to assess the costs and restructure your portfolio. If you’re an avid trader, you need to and should include the costs of trading in your calculations. If you’re a new investor, well, the world is your oyster as there’s now so much choice available in terms of low-cost products such as ETFs and low-cost share-trading platforms. It’s particularly noticeable if you’re investing small amounts into shares.
As the capital invested shrinks, the percentage cost erodes the performance, particularly for amounts under $2,000 per share.
This is an edited extract from “Shareplicity: A simple approach to share investing” by Danielle Ecuyer, now available at all good bookstores and online.
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