For me, I have dabbled a few times in the share market and have decided I am a terrible investor. My appetite for risk is rather small; meaning the first site of a loss scares the hell out of me. I end up monitoring the market daily; looking at how much money I have lost or gained in a single day and normally end up taking a loss to secure the remaining dollars I have invested back into my pockets.

According to experts, this is the wrong way to approach an investment in shares. However after having some time to think this over, I am now doubting whether I am actually a bad investor or simply part of the norm with reasonable concerns over investing my money in the share market.
Here is why;

Most advisors tend to tell you to focus on the long term

Just about every financial institution will tell you to focus on the long term when investing in shares. They will also go on to draw comparisons between someone who invested in shares compared to someone who opted for safer investments (such as term deposits, property or high interest savings accounts).

Though these statistics become compelling to show you that over the long term shares have outperformed cash – it still leaves me worried. Who in their right mind is happy to let their cash go up and down (often drastically) and still act like they aren’t remotely worried?

I see it going up and down daily and think, ‘what if I lost it all?’ – the thought of losing my money or having sleepless nights while it is in the market gets me very concerned. This shows my tolerance to risk is low, ‘each to their own’ some will say.

The disclaimer in the advice given is contradictory to the above

Now although the statistics provided by advisors show shares as a good long term investment, these statistics are based on past performance.
The disclaimer that you will see in emails from advisors or institutions trying to get you into the market, clearly states: “Past performance is not an indication of future returns”.

This means that the market could go anywhere. It in all honesty is uncharted territory and just because it performed well or bad in the past – has no actually ground to show that history will repeat itself. Instead history is written as we go when it comes to investing in shares.

My risk tolerance indicates I should not be investing in shares

My tolerance for risk is clearly low. I hate the idea of losing money, even if it is temporarily. This is likely due to the fact that most of my money I have to invest, I will likely need at some point and cannot afford to lock it into the market for a 10-15 year period.

Who is to say that the boom we saw in the early 90’s on the stock market will happen again? These past returns drive people in the present to invest – which is a bad basis for making decisions.

So unless you have research and ideas about the returns of a company you wish to invest in, the mum and dad investors tend to be led by past performance which may or may not yield a good result.

So am I really a bad investor? Or am I just a realist with a low threshold to risk. I say the latter if I may say so myself.

Get Your Learning

Know the pros and cons of every kind of investment. For instance, I just learned that you need a minimum of $1,000 to take advantage of well-performing government bonds. Read books, articles, talk to people you know who invest (preferably ones that invest well). Talk to a financial advisor, and don’t believe anyone who tells you that their investment is fail-proof.

Define Your Risk Comfort Level

Low risk might not keep up with inflation. High risk might mean you win big or lose everything. Generally, most people want to fall somewhere in between. It could be a good idea to have a portion of your investment that’s safe, and some that’s higher risk. Don’t do anything out of your comfort level, or would hinder your finances for the long-term. Know yourself, and your risk comfort level.

Investments And Goals

Match your investing with your goals. Define your short -terms goals, and how much money you’ll need to achieve them. Obviously, don’t put all your eggs into the growth market if you’re going to need some of it in 12 months time.

Gurus Are No Guide

There’s always something that’s the next big thing. A sure thing. A huge performer. There have been a million of them, and a million gurus who will tell you without a shadow of a doubt that it’s the one for you. Trust, instead, funds that withstand the vagaries of the markets. review shareholder reports, look at consistent companies with solid management.

Diversify

A variety of assets is your best protection. Invest in a mix of stocks, bonds and cash investments. One part goes down, another aspect of your portfolio should steer you through.

Automatic

Invest automatically. I don’t mean unthinkingly; just set up automatic deductions on a weekly basis into an investment account. Setting up automatic deductions for both your savings and your investing will help you set aside a tidy little nest egg for yourself.

Stick To It

Stick to your investment plan and don’t react to the ups and downs of the market. The more often you switch, the more transaction costs you’ll rack up. Periodically check in with your financial planner, and keep an eye on your investments, but don’t make any kneejerk decisions. Knowledge is financial power.

Protection

Volatility has, of course, the potential to run amuck with your finances. A sharp downturn can do terrible things should you be thinking of selling some shares to make a big investment. Or if you panic about where the shares are going and sell off when the market is at the bottom. As mentioned in the Forbes article, historically, steep swings have cancelled each other out and the end result is a slight but smooth upward trend. So, realistically, as a long-term investor, your stocks should make you a happy investor. it’s crucial to protect yourself against either of the above scenarios in order to profit from your shares. It’s recommended that you keep enough cash to cover 24 months worth of living expenses. That will avert the possibility of being forced to sell while the market is down, due to an emergency or urgent need for cash.

Panic

If you’re the kind to panic, on occasion, you’re not alone. Finance is emotional. So forestall your less-rational self with a smart financial plan or, as described in Forbes, a smart asset allocation. In English, that simply means a mix of stocks, bonds and other asset classes suitable to your situation. There is no point investing in something outside of your comfort level or that is unsuitable; the likelihood of a panic response and selling too soon is too high, and there is no faster way to lose money. Updating your asset allocation as your situation changes is a great idea- your lifestyle changes and your investing adapts. But changing your investment strategy as a panic reaction is a poor financial decision.

Rebalance

One financial advisor in the Forbes article suggests rebalancing as a means of hedging your shares. If you have a predetermined asset allocation, say- as suggested in the article- 65% in stocks and 35% in bonds. If the value of your stocks drop and your bonds rise, you’ll have to buy some stocks and sell some bonds to return to the predetermined allocation. Which means, in order to stick to your ratios, you will be selling some assets when they are expensive and buying others when they are cheaper. Obviously, consulting with your advisor is optimum. Some investors set aside a portion of their portfolio for riskier assets, and Forbes suggests you could take note of the Chicago Board Options Exchange Volatility Index. If you have appreciated you may lose all of the money you have allocated to higher risk, then it’s a personal choice. You may gain, you may lose. Otherwise, with significant protection and a long-term strategy, investing can be a fantastic way to inflation-proof your assets.

There are two things you must know about calculating capital gains tax on shares.

Firstly – if you hold the shares for more than 12 months, your capital gains tax receives a 50% discount.

Secondly – if you sell your shares before 12 months, you are liable for no discount and in turn pay more tax on the sale of your shares.

So here is how you calculate capital gains tax on shares

You decide to invest $100 in shares. Luckily for you, the value of these shares rises to $200 and you decide you would like to sell.
Under the above two scenarios, your tax would work out like this:

Selling the shares after only holding them for 2 months

You have made $100 on your investment. You must now pay tax on these earnings at your individual income tax bracket.
$100 x (income tax bracket – e.g. 30%) = Tax to pay is $30.

Selling the shares after holding for 12 months or more – e.g you get the CGT discount

You have made $100 on your investment. As you held for over 12 months, you now get a 50% discount on the capital gains tax you must pay.
This means that instead of declaring $100 in earnings, you now only need to pay tax on 50% of the earnings.

$50 x (income tax bracket – e.g. 30%) = Tax to pay is $15

So what does this mean when paying tax on your shares?

It means that holding your shares for 12 months can halve the amount of tax you pay on the profits. Consider this next time you make money via shares within a 12 month period.

If you need further assistance in working out the tax implications of shares, it would be best to contact an accountant to discuss. This is merely a guide to calculating CGT (capital gains tax) when it comes to shares so you are better informed about what is rightfully yours and what you owe to Mr.Tax Man.

I still love that he was mocked for not joining in on the dot.com boom. Imagine the eating of humble pie that went on around America once all that hit the fan. According to this article, anyone who invested in $10,000 in Berkshire Hathaway (Buffet’s company) in 1965 would now be worth $80 million.

How I wish he could run my life. Not only would I get to hang with Obama, Warren would take one look at what I earn and what my debts are and whip me up some magic concoction that would make me both solvent and an acutely clever investor. Apparently, he also got laughed at for suggesting people invest in October 2008. Not many people took his advice but anyone who did is now up 25%. If I knew Warren Buffett, I would probably rely on him for every decision. What to wear, who to date, and certainly where to invest.

I’m afraid I’m still waiting on the answer to the first two questions, but luckily for us, here are some of his pointers on what to do if you have just kicked off an investment portfolio.

Stay liquid

Fluidity and liquidity are crucial. Always arrange your finances so that any demand for cash will be easily overwhelmed by the liquidity you have at your disposal.

Getting stuck in one thing without being able to move you money around is apparently not good (and anyone who has had an unexpected expense with all their money in a term deposit will know exactly how that feels).

Buy when everyone is selling

You need a certain amount of financial fat to get away with this one. Apparently fear is an investor’s best friend. That’s probably why I’m not much of an investor- I like peace and quiet and 8 hours of sleep a night.

Buffett made a bucketload over the last couple of years, because not many people had the sense (or the money) to capitalize on a plunging stockmarket.

Don’t buy when everyone else is buying

Obviously this is the only way you can afford to buy when everyone is selling. Hold off your purchases when the stockmarket is buoyant. You may feel better about it, but you’ll lose money at the plunge and have nothing to buy with.

Patience is apparently another important characteristic, making investment look more and more distant from my personality type.

Understand what you own

Here’s the crux of why Buffett is so good. He never invests in something he can’t predict. He “avoids businesses whose future we can’t evaluate, no matter how exciting their products may be”. Hence the dodging of the dot.com bullet.

Dramatic growth is never as good as gradual and positive growth that is sustainable and long term. He suggests investing based on what you know of a company or institution, not what the media tells you, which I would say was good advice for any kind of financial decision.

Now if only I could get that kind of advice on my love life and on whether purple really is a flattering colour for my skin tone, my whole life would be much improved.

What do you think of these tips for the new investor?

They’re not necessarily doing it consciously, and I’m sure they’d rather things didn’t go so pear shaped. If you fall into that category (and let’s admit, at one point or another, most of us do), you’ll probably find that your financial security is being hampered.

So, how does self-sabatage damage your investment? And how can you recognize the signs and (hopefully) start addressing the problem. If you can stop the sabotage, your investments and financial future will flourish.

Forbes, as always has come to the rescue, and inspired the following list.

Trading it all away

I have a short attention span too, but let it enter your investment activities and your finances will suffer. Research shows that unmarried men are overconfident, and potentially a little bit bored, and are therefore 67% more likely to trade than unmarried women. This leads to unmarried women performing better than unmarried men by 1.4 percentage points a year.

Running it up

Taxes. Poor market timing. Commissions. They’ll all drain the life out of your investments if not viewed with a wary eye and treated with a bit of caution.

Playing with the big boys

Acording to Odean, an expert who recently wrote a paper on this very issue, investors tend to be pretty cocky and think that they can go up against Goldman Sachs or JPMorgan Chase. Imagine a football match. You are the goalie, and the other team’s strikers are Maradona, Pele and Zidane and they’re all running towards you. That’s how it’s going to feel.

Distracted by bright lights

It’s tempting to buy into Apple and Google, but in reality, maybe you should have thought about that ten years ago. Not all good stock options get that amount of press. Don’t buy into the Next Big Thing trash talk, but do some research and find yourself a stock option that performs. It doesn’t necessarily have to be a red carpet wannabe to do so.

Mis-time the pitch

Buying a stock option the day after it ranks as a top performer is a badly timed investment. At that point, there’s only one direction it’s likely to go, and that ain’t up.

Use that crystal ball

Odean found that, generally, the stocks people sell tend to outperform the ones they then buy. Don’t fall into the trap. Stick with your stocks, and listen to the advice of experts. Don’t get trigger happy.

Admit it

That said, if you’ve bought a bad stock, cut your losses and admit the faux pas. Don’t hold onto them as if a lifeline. Talk about your options with an expert and cut the baggage free.

It’s all too easy

Investors who switched from telephone banking to online banking went from beating the market by 2% annually to lagging behind it by 3%. I find that an amazing fact, but it makes sense. Of course, everything online is easier, quicker, less cumbersome which is potentially exactly what you don’t want when investing.

Consideration, rationality and a bit of time are all good things when it comes to your money.

What habits do you think sabotage your chances of success when it comes to investing?

Margin loans are quite useful for people who can borrow what they can afford to pay back safely.

What is margin lending?

Using a margin loan arrangement, the investor’s portfolio of shares and funds are used as security for the loan. The risk involved is that sometimes the market can drop below the level of security required by the banks and once this process has fallen far enough that the ratio of the loan to the portfolio exceeds the max. st by the lender, it (the bank) will step up and make a margin call.

Loan to valuation ratio (LVR)

The lender/bank will ask for additional funds or assets to reduce the loan size and bring the loan-to-valuation ratio (LVR) back below the maximum. If investors are unable to make the extra loan repayment in cash, they may be forced to sell part of their investment.

Avoid margin calls at all costs

It’s better if investors can avoid margin calls and the risks are reduced if the investor doesn’t borrow up to the maximum LVR in the first place, often up to 70 per cent. Lenders often allow a “buffer” of 5 per cent above the maximum LVR which acts to prevent margin calls when the LVR is only slightly exceeded.

The Australian Consumers’ Association advises investors to ensure they can always be contacted by their lenders. Borrowers have to react quickly to margin calls, usually within 24 hours. If the lender can’t contact them, it will make the decision on their behalf, usually to sell down the portfolio.

Save money on margin lending

1. Shop around for the most competitive loan rate. Suncorp Metway offers good rates and alot of times smaller credit unions such as Bendigo and BOQ can help.
2. Always borrow what you can afford to repay.
3. Make sure the interest you pay does not outweigh the profits you are aiming for with your shares in the long run. No point making $5000 if the loan costs $10,000 to repay.

This article will now go on to help you understand franking credits and give insight into the tax benefits of franking credits from Australian Equities investing.

Franking Credits

It all starts with a dividend. A dividend is the profit a company makes that is then paid on to shareholders. This is normally paid two times a year, in the interim period and final period. Companies do not have to pay a dividend, they can choose to reinvest the profits in research or business structure (which can be a good thing). Some return profit to shareholders in the form of dividends as a form of income oriented investment.

You will recieved a dividend cheque in the mail if you are eligible and it will give you a share of the companies profit according to how many shares you hold. When you recieved a Franked dividend, you are recieving a payment that has already been taxed.

In your dividend statement you will receive details of how much of your dividend is franked and how much isn’t.

Take this example for instance;

• In an example borrowed from the ATO, Bill receives a dividend statement from Company A that details an unfranked dividend of $200, a franked dividend of $700 and a franking credit of $300. Bill’s total assessable dividend income is $1200 ($200+$700+300). If Bill earns a salary of $40,000 a year, and his dividend income is his only other income received, then his total taxable income is $40,000 + $1,200 = $41,200. At 2006-07 income tax rates Bill’s tax on that income would be $7,710 but that is offset by his $300 franking credit, reducing his final tax payable for the year to $7,410.

How do you claim your dividends?

You do not have to claim your dividend as a cheque/cash – some companies offer the option of participating in a ‘dividend re-investment plan‘ . Dividend re-investment schemes can help you make good money in the long term, as you will slowly acquire a larger holding of shares which will become more valuable (thats if you are holding onto solid Blue Chip shares).
For example, $100 invested in the All Ordinaries index in 1900, due to the magic of compounding, would have grown to more than $60,000 today. But if you’d reinvested your dividends, that amount would be more than $7 million. Worth a thought.

These are the kinds of questions that most Australian’s face when looking at ways of investing their money. This article is intended to give you a breakdown of what Managed Funds are and the pro’s and con’s associated compared to investing in the ASX on your own.

What is a managed fund?

Put simply, it is an investment that is managed by a financial expert/team, or qualified individual who’s job is too utilise the money within the Managed Fund for the sole purpose of providing a return on investment.

Managed funds work on the basis that each fund has a particular goal or desired rish factor. Some funds are high risk with potential for higher returns, while others are low risk managed funds and in turn most likely provide stable yet low returns.

The investment house/individual you choose to go with, for instance Colonial First State Managed Funds will decide what risk category your fund falls under, and the percentage split of what the fund will invest in. The purpose of splitting the investment areas is to diversify the investment as a whole and allow it to grow without to much correlation to any one investment area.

An example of the split can be the following;

• 25% Australian Shares
• 20% Cash
• 20% US Shares
• 35% Bonds

This split up shows that a managed fund is diversified amongst multiple assets – with the major share (35% in bonds) that are secure and wont lose money. This would probably be considered small to medium risk.

Why are managed funds popular?

Managed funds are popular because people don’t need to make their own decisions when investing. They rely on the fact that an established market leading investment house will do so for them. Also there is the following reasons;

1. Its simple to diversify your investments. The investment house does this for you with the split up of the fund you buy into. Whether they split it amongst asset classes, industries, sectors, countries or companies.
2. You have Experts Managing your Money 24/7. These professionals everyday job is to make the correct decisions with money and watch the indicators of what will happen next so your money is always one step ahead.
3. Re-investing is easy. You can re-invest your earnings through compounding. This can add up over many years!
4. You can easily Setup a Regular Investment Plan. I personally allocate 20% of each pay cheque to buy more units in my managed fund each month. This strategy can be put into place on a regular monthly, weekly or fortnightly plan, its called ‘Paying yourself first’.
5. Your investment can be used to generate income or growth – and in some cases, both! The returns you get from a managed fund usually come in two forms. Income (paid to you as a ‘distribution’) and capital growth (achieved only when the unit price increases in value).
6. You can invest smaller sums of money then that of the share market. Eg; you can purchase batches of units from as little as $1000 in some funds. Managed funds allow you to access certain investments at a fraction of the usual cost. This is because you share these costs with other members of the fund rather than having to pay the minimum investment fee on your own.

Pro’s and Con’s of Managed Funds

Benefits of Managed Funds

• Diversification
• Low start-up costs
• Expert management
• Regular investment options
• Potential to earn income or to reinvest
• Potential for high returns
• Choice of Strategies at different levels of risk

Downsides of Managed Funds

• Set-up fees around 4% on joining
• Ongoing costs around 2% per annum
• Possible exit fees
• May not be liquid

Pro’s and Con’s of DIY Shares

Benefits of DIY Shares

• Low start-up costs
• Potential for high returns
• High degree of control over investment
• Generally stays ahead of inflation over the long term
• Dividend reinvestment

Downsides of DIY Shares

• Limited ability to diversify
• Subject to market forces
• Subject to high risk
• Brokerage fees on share trades

Suggested Managed Fund Providers

• Colonial First State Managed Funds.
• Investsmart Managed Fund Comparisons
  

I use shares and managed funds

Personally I have investments in both my own personal share portfolio + Managed funds. The reason for this is that I put away around $1000 to $1500 a month into a managed fund for growth purposes over the next 20 years, much like a Super contribution Version 2.

I also save up money and buy large batches of shares for investment growth purposes aswell, this allows me to buy substantial holding amounts every 3-4 months. This allows me to Invest in Shares regularly.

There are however, many factors that should be considered before any attempt is made to invest in real estate; this is not the case with the next option. Trading online is the cleanest way to earn money and almost anyone can have a go; you would be surprised at just how many people are now turning their hands to online investment. Traders have the capability of doing research, buying, selling and making money all with the simplicity of sitting in front of a computer. This is without doubt the most addictive and it is easy to get into trouble if you are someone with an addictive personality.

Whichever market you plan to work in, remember investing is a skill; true it can be learned but that often requires patience which is something many short term investors do not have. If you are truly serious about making money from trading then simply must do the basics, study and research the field you are in. As usual, there is a huge amount of free information on the internet if you really want to learn more; remember, successful people do not use luck all the time! Set yourself a limit of how much you can afford to lose and do not go beyond this because although investing is a great deal of fun it is also a very deep pit where money can be lost forever.