CHOICE guide to buying shares

The plunging share market is attracting bargain hunters. CHOICE guides first-time investors through their options.
 
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05.Super and what the experts say

Superannuation

Chances are you’re already exposed to shares through your super fund. Ninety percent of people are in their employer’s default fund, which is where your money goes if you don’t make an active choice. The default is often a “balanced” option that invests in a mix of assets, including cash and fixed interest, and 60%-75% in property and shares.

Some super funds enable you to trade individual shares that are listed on the Australian Stock Exchange (trading fees apply). If you go down this path, it’s a good idea to make sure your super fund portfolio remains diversified between different companies, sectors and types of investments. Don’t put all your eggs in one basket.

What the experts say

In mid-February 2009, CHOICE asked some industry participants for their views about the outlook for Australian shares. Most were optimistic about the medium- to long-term prospects for Australian shares, cautioning that in the short term, prices could fall further. None of these opinions, however, are financial advice.

Shane Oliver, Chief Economist AMP: “Shares are now good value from a long-term perspective. There are bargains – shares with a high dividend yield and low price-to-earnings ratios. Dividend yields are attractive, at about 6.5% to 7% including franking credits, although I wouldn’t be rushing into shares with everything you have right now, as it’s too early to conclude the market has bottomed. It’s a good time to start averaging into shares.”

David Wright, Director Zenith Partners, which researches managed funds and provides recommended lists to financial planners: “We anticipate more volatility in the share market and there is some risk that it could go lower. If and when there’s a recovery it’s likely to happen quickly, with much of the rebound happening in the first few months. It’s very difficult to time the top and bottom of the market – I haven’t seen any professional investor do it. The best risk management strategy for new investors is to buy shares regularly through averaging in” (see Jargon Buster, opposite).

Savanth Sebastian, Economist CommSec: “Equity markets are weak and more falls could be on the way. However, price-to-earnings ratios are at their lowest level in 28 years and some companies are paying dividends of 8% to 10%. If you’re looking to invest in shares, take a defensive strategy, accumulating blue chips in areas like healthcare, telecommunications and consumer staples. Blue chip companies with solid growth prospect should be considered.”

Roger Montgomery, Chairman Clime Capital, boutique fund manager: “The time to be interested in investing in shares is when nobody else is, and that seems to be now. The key to share investing is to find great quality businesses that will grow profits over the next five to 10 years, but not at the expense of investors’ capital. Before investing, ask yourself if you have an understanding of how to value a business and assess its performance. If you don’t, use an expert [managed fund] or learn. Look for fund managers that follow an approach that provides great three-, five- and 10-year performance. Don’t just compare the overall percentage return during that time, but how it was achieved. Look for managers with a rational and commonsense approach.”

 

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