Investing in shares has played a major part in my life for more than 50 years, and I have long believed they are the best long-term investment anybody could have.
But this is a view not shared by everybody - time and again I have heard statements like "I invested in shares once and lost the lot", "aren't shares high risk?" or "I guess it's okay having a flutter on the stock market if you don't spend more than you can afford to lose."
These views were reinforced by the extraordinary events of last week, when a horde of day traders, acting on information from social media site WallStreetBets, joined forces to do battle with American hedge funds who had shorted stocks like GameStop who had shot up 8720 per cent in just two months.
Apparently much of the trading was done on the new market trading app Robinhood, with funds provided by stimulus checks.
The craziness even spread to a small Australian mining company who shares the same stock market code as GameStop.
It's price shot up by 50 per cent last Thursday as 18 million shares were bought by day traders who mistook it for the American GameStop.
Let's get real - this is not investing in shares it's simply gambling. And the fact that much of the money came from stimulus checks, is an indication of the type of people who are now piling into the latest craze.
The antics of last few days have not diminished my enthusiasm for shares, but this may be a good time to reiterate some share market basics.
First, you need to decide whether you are a trader who buys today in the hope of reselling at a profit in a very short time, or whether you are an investor who looks for a quality share they could hold for the long-term.
When you invest in shares you are acquiring a share in a business, and if that business goes well you should do well too.
This is why experienced investors look for a strong business, with good management, relatively small debt, and a history of performing well.
The reward for the investor is regular dividends, and the ability to participate in the growth of the company as time passes. It is the antithesis of share trading.
Anybody investing in shares should take a long-term view and be prepared to hold their portfolio when the market goes through a normal volatile phase.
Furthermore, if they are retired, they should keep at least 3 to 5 years planned expenditure in cash form so they are never forced to liquidate shares at the worst possible time.
Many would-be investors in shares just don't know where to start. For them, a simple strategy is to buy an index fund such as VAS or STW.
The ongoing fees are minuscule, you could start with as little as $100, and because they are listed on the stock market you can buy and sell at short notice. But they are not meant for traders - they are meant for people who want of have an interest in the share market yet be unconcerned about day-to-day fluctuations.
To get an idea of how the index is performed just have a play with the Stock Market Calculator on my website www.noelwhittaker.com.au .
Here you can enter a notional sum, pick a starting finishing date of your choosing and see how the investment would have performed if it matched the All Ordinaries Accumulation Index.
For example, an investment of $100,000 in January 2011 were now be worth $214,000. That's a gain of 8.82 per cent per annum for 10 years. I reckon that's a better bet than fighting it out with day traders.
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Noel answers your money questions
When my elderly mother entered Aged Care Residential, we were told by the Government to leave $47,000 in her bank account after paying the RAD. We made a RAD deposit and increased this when her unit was sold. Unfortunately, she still owes a balance on which she pays over 6 per cent interest.
Her savings bank account is now approximately $55,000. If $45,000 was to be paid into her RAD, the amount of interest that she would lose a year drops from $10,000 to $2700 approximately. Is it possible to pay more into the RAD to reduce the high loss to interest every year?
Am I allowed to do this as her EPA? Her doctor's letter to the Bank states that she still has some control of her faculties. Is there a government ruling that states her assets must remain at the amount stated for her on entry to the home ($47,000)? If the money is used to reduce the RAD, it remains the property of the home until my mother leaves.
The minimum asset amount is the amount that the person must be left with when they first move in. Many people wrongly believe that you must be left with this amount in the bank or other investments but it can include any assessable assets such as car, furniture, jewellery, or artwork.
After the initial 28 day period of moving into the aged care facility you can choose to pay more towards the RAD at any time.
However, keep in mind that while the facility must allow you to put money into the RAD, they are not legally obligated to let you withdraw it in the future, other than when Mum leaves. As her attorney you can take any necessary action in this area.
My partner and I work full time, with combined earnings of $197,000. We have $180,000 in savings save $5000 each month, and have no debt. I contribute $350 a fortnight to super and have $40,000 in my fund; my partner contributes 15 per cent and has $60,000.
We currently rent, paying $1950 a month, and hope to start a family within the next two years when my partner will stop work. We were thinking of investing in the share market but would like to buy our own home, and are worried about being over committed. Any advice on the best options to build wealth would be great.
Your best course of action will depend on your goals. Based on what you have said it would seem that acquiring your own home is your favourite option. If this is the case you should do a budget on the assumption that you have just one income and work out how much you could afford on loan repayments.
Add another $2000 a year for home ownership costs such as rates, insurance and maintenance. Once you've done that talk to a lender to find out whether you can buy property in the price range that your savings and repayment capacity will allow.
I am totally confused about the $1.6 million cap on superannuation balances. What happens to any access over this amount. If I had $2 million in superannuation, and converted $1.6 million into pension mode, would I still have access to the remaining $400,000. What would my options be?
There is a common misunderstanding about the $1.6 million transfer balance cap. As its name implies this is the maximum amount a person can transfer from accumulation mode to pension mode in their lifetime.
Once that transfer has been made, they are not allowed to make any further transfers to pension mode, but any money held in pension mode can continue to grow.
This could happen if they made the minimum withdrawals from pension mode, and their fund increased in value at a higher rate than the minimum withdrawals.
For example, for the current financial year a person aged between 65 and 74 must withdraw 2.5 per cent of their balance. Given a good fund should do better than 2.5 per cent the amount in pension should be growing.
If you had $2 million in superannuation, and transferred $1.6 million from accumulation mode to pension mode, the fund balance would then comprise $400,000 in accumulation mode and $1.6 million in pension mode.
You could can make withdrawals as needed from either one or from both. Keep in mind that Indexation of the transfer balance cap from $1.6 to $1.7 million will occur on July 1, 2021 if the All Groups CPI figure for the December 2020 quarter is 116.9 or higher.
Therefore, unless there is a desperate need to start the pension, people may well be well advised to defer starting their pension until after June 30.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. firstname.lastname@example.org