Some investors see the sharemarket and share buying as too complex and beyond their understanding. For this reason they opt for a professional fund manager. There is a widely-held belief that fund managers have the necessary experience and expertise to manage investors’ money better than they are able to. Fund managers would obviously like you to believe this, but recent research does not support this assertion.
According to research house and funds monitoring agency ASSIRT Pty Ltd., which measures fund manager performance, out of 59 managed funds in the diversified shares sector, 22 earned a lower return than the sharemarket average.
An individual investor has several advantages over fund managers. Most fund manager’s focus on the top 100 companies listed on the Australian Stock Exchange (ASX). This is because the fund manager’s deal in large share volumes and shares of the top companies are easy to sell. There are some good investment opportunities in the smaller companies that are suitable for individual investors, who do not have the same liquidity fears as large investors.
There are 1400 hundred companies listed on the ASX. At any one time you should not have more than 10 to 15 shares (from different companies) in your share portfolio. This means you should discard many companies and just invest in the ones you know well. This is because your portfolio will start to resemble the sharemarket itself if you have too many shares, and it will look as if you do not know what you are doing. The way you can test how well you know the business of a company, is to explain it to someone else in less than five minutes. If you cannot do this you should probably not invest in that particular company.
You need to gain an understanding of the business prospects of different companies. Once you understand a company’s business you will be able to assess its prospects in terms of its markets, the industry in which it is located, its management and its potential for future growth. You can know a company better than an institutional investor by acquiring publicly-available information, and then using logical reasoning to apply your knowledge.
You need to be sure what you are buying and that you are paying less than the company is worth, i.e. the share price you buy at is undervalued. You can only do this by thoroughly researching the company you invest in and its environment. You should focus on companies that have a 10 to 20 year history of paying dividends that increase each year. If a company can do this you can reasonably expect them to keep increasing their dividends into the future. This indicates that the company is good for investing in.
Successful share investors have investment plans. This means that they:
Establish at the outset how much they will invest in the sharemarket.
Formulate a methodology for identifying undervalued shares.
Determine how much they can reasonably risk on any one investment.
Set in place mechanisms for minimizing losses.
The amount you choose to invest in the sharemarket will depend on the total funds you have available, the risks attached to investing in shares, your attitude to those risks, your need for current and future income, and your time horizon.
You do not need a lot of experience and expertise to invest in shares.
You may be better off being an individual investor than going through a professional fund manager. This is because you can invest in good quality shares of smaller companies that large investors would not touch.
You should invest in no more 10 to 15 different shares in your portfolio.
You need find out everything you can about a company’s business and its prospects for future growth. Look at the companies dividends over the last 10-20 years – if they keep increasing from year to year the company is probably good to invest in.
You need to have a sound investment plan.