How to get started on the stock market, how to build your wealth and the best way to react when billions of dollars are wiped off the market.
Last week nearly $80 billion was wiped off the Australian share market in two days as weak global growth and international recession fears spooked investors.
But what does that mean for you and what does that mean you should do if you have shares or want to have shares?
A lot of people will be panicked by such news into selling off whatever stocks they have or staying away from the market all together, but the basic principle of trading is to buy low and sell high.
This means huge losses, such as those experienced last week, should be viewed as an opportunity, says Burman chief investment officer Julia Lee.
She said last week’s sell-off on the market reminds her of October last year which was the year’s worst performing month, losing more than 6 per cent.
But this was followed by a bumper four months through to the end of December where the ASX gained more than 20 per cent.
The expert admits there is a certain degree of volatility in investing the market, but if you pick the right shares then your money can grow over time.
Trading veteran and director at DNR Capital Jamie Nicol says investors should take a long term approach to fattening your wallet on the market.
“Investing small amounts each month, increasing those amounts when markets are weak and allowing the compounding of dividends and growth will build wealth steadily and impressively over time,”.
HOW DO I GET STARTED
“The main thing I would say is when you’re starting out is just start low risk and then build with risk as you gain confidence,” Ms Lee told news.com.au.
“That might mean starting off with smaller sums of money until you feel more confident.
“And then taking over more and more of investing your money. Or that might mean just starting out with straight shares before getting into anything more complex or more risky.
Ms Lee said people usually want to make as much money as they can over a short term when beginning on the market, which tends to mean they’ll invest in the riskier stocks on the market.
“When you’re starting out, it’s really important to realise it takes a while to get your head around how shares behave and the lessons that you need to learn,” she said.
“So look at it as a process, it’s better to learn those lessons when you’re taking less risk and as you get more knowledgeable to build risk over time.”
BE PATIENT
Ms Lee says the key to building wealth is to put your money in a place where it has a chance to grow but also make sure you do it on a regular basis.
“There’s a thing call the hot-cold gap and this is the difference between what people intend to do versus what they actually do,” she said.
Ms Lee says this is similar to having the discipline with a diet — it’s all well and good to say you’ll have a salad but when you get hungry at lunch, that hamburger and chips smells mighty fine.
“What you plan to do in a cold scenario as opposed to what you do when you’re surrounded by temptation — which is the hot scenario — is usually quite different and that’s because of people’s self control mechanism,” she said.
“And it’s a shame when it comes to building wealth, people usually intend to save a lot of money and not spend a lot of money as opposed to what they will do and put something on their credit card, there tends to be a gap.
“The easiest way to build wealth over time is to take your money out as soon as you get your pay in your account, put it into a separate investment where you can’t see it and do that on a regular basis.”
HOW TO REACT TO THE MARKET
A lot of naive investors see news reports of the market falling with hyperboles such as “bloodbath” and “wipe-out” and are spooked to thinking they should react in some way, but Ms Lee says to remember the basic principle: buy low and sell high.
“Which generally means buying shares when everybody else is selling shares or panicking,” she said.
“When it comes to investing, people who are starting out tend to move with the crowd so when they see those headlines ‘$43 billion sell-off in the market’, they panic and they sell.
“And usually they’re buying when everybody is talking about the sharemarket reaching record highs and how much money they’re making in the market which is probably when they should be looking when they should be looking at taking some money off the table.”
HOW TO REACT TO THE MARKET
“Sometimes it’s important just to start,” says Ms Lee.
“If you’re scared, put in a little bit of money but just having that money in the market means that you’re constantly on the lookout and interested.
“Whereas just thinking about it all the time means you don’t end up doing anything.”