Should You Invest in Shares And If So Which Ones?

Now we get to where I made most of my money to begin with (and no that doesn’t include the last few years – I got hit just like everyone else) and that’s the share market.

I know that not everyone wants to invest directly in shares and would rather use a more passive approach to the stock market such as buying managed funds instead (and that’s cool if you want to do it that way) but for me I like the thrill and excitement of getting my hands dirty in research and choosing to buy stocks directly (yes I’m weird like that).

This isn’t a get rich quick method of making money however (even though sometimes that happens when we are in a bull market), no, investing in stocks is a long term way of building wealth.

So having said that, should you invest in shares?  Do you still want to?  Coolio, here’s what to do.  Buy my other book Shopping for Shares.  Ok done, article finished.  Bye Bye.

Just kidding, I’m going to give you the basics here for free.  Aren’t I nice.

Anyway .. where was I?

Oh yes, the stock market.

I’m going to assume that you already have an account which you can trade through.  If not that’s your first step.

Next is doing your research to find the best companies.

To get a diversified portfolio I recommend using three different types of strategies:

1. Long term shares
2. Short term shares
3. Shares with high dividend payments

There are different strategies to all of them but here is a basic run down of what I do to choose stocks within each of methods:

Long term stock investment

While I go into more detail in my book Shopping for Shares, generally for the Australian stock market I look for the following things:

• In the All Ords Index
• Return on Equity over 15%
• Debt to Equity under 75%
• Earnings Stability over 80% (this one can be difficult to find)
• Decent share price return over 5% or 10% p.a.

Fairly soon I’ll be making a list of all of those companies that fit my rules over at my shopping for shares website.

Short term stock investment

I use quite a different strategy for short term investing (obviously).  In bear markets (like now) it can be difficult to find good quick growth stocks but you can still do it if you know what to look for.

• In All Ords Index
• Look for Outperforming sectors
• Look at which companies within that sector are doing the best
• See what the increase over the past two months has been.
• Buy with that increase as your target over the next few months.
• Sell if it falls below about 10% or if it hasn’t reached your target within 6 months.

Buying for the Dividend Income

This strategy is a newer strategy for me, but one I’ve become increasing more interested in as I invest since it allows you to take advantage of both capital growth when the market is good and also receive regular dividend payments no matter what the market is doing.

• Stocks within the All Ords (although generally I tend to stick with the top 100 or even top 50)
• Decent financials (as close to my long term rules as possible)
• A dividend yield of over 5% (the higher the better).

Having a good mix of all of the three methods should give you good basic diversification for your portfolio.

So how much money should you invest in stocks?

Hmm, let’s see.  As a ball park consider the following amounts (for the average Australian).

- You should have $2,000 in your emergency account.
- No debt.
- $10,000 in a high interest savings account.
- $50,000 in shares / managed funds (either, or, or combination)

So yes.  Around $50K.

Sounds a lot but you’ll be building it up gradually over time and it depends on how the market is doing as to how quick you’ll be able to get there.

The rest of your money is going to go to pay off your mortgage.  And that’ll be what I’ll concentrate on next …