A topic which always attracts interest when I present at the Your Money and You session at ADF transition seminars is share trading. ADF members always seem interested in the share market and the best ways to invest in shares.
Over the long term, a portfolio of good quality shares – often referred to as ‘blue chips’ – should grow in value, pay you income through dividends and provide tax benefits. If you have patience, time and long-term investment goals, buying and holding good quality shares can be an effective wealth-creation strategy.
However, an alarming – and growing – trend is the number of Australians and ADF members signing up to share trading courses or systems. Often referred to as ‘day trading’ or ‘stock picking’, these programs provide investors with techniques to consistently outperform ‘the index’ such as the ‘Australian All Ordinaries’. This is a highly speculative way to invest and in some ways no different to backing a horse in the fifth at Royal Randwick.
At a recent transition seminar, I met an ADF member who had made some early profits with one of these share trading programs. He was so confident in the techniques; he was set to quit his safe and secure job to take on share trading full-time. Not only did he plan to use his all his savings to get started, but he also intended on trading his super through a self managed super fund. While I pointed out all the risks, he didn’t seem too concerned about potentially gambling away his life savings.
If you are thinking about taking up day trading, here are some facts to consider from a leading academic institution: the chances of beating the index through active funds management over 10 years is one in 36, and the odds of winning on the roulette wheel are one in 37. That’s right: you – and investment professionals – have as much chance of beating the index over the long-term as you do of outsmarting the casinos.
I have also seen research stating that 80 per cent of investment professionals such as fund managers and stockbrokers can’t beat the index over a five-year period. Sure, some fund managers, professional traders and even part-time punters can outperform the index over one or two years, but over the medium- and longer-term, the arguments for active investment management don’t stack up.
A form of investment that is growing in popularity is passive investment or beta investing such as purchasing an index fund or exchange traded fund. These funds don’t try to pick and choose among all the different shares on offer. They simply buy the shares in a particular sharemarket index such as the ASX 200. The goal of these types of funds is to generate a return like the underlying index. Therefore, if the index goes up by ten per cent, the index fund should go up by 10 per cent. Off that will come a fee, but this tends to be on the small side compared to what a broker or active fund manager would charge.
Marty Switzer, BEc Soc Sc
ADF Transition Seminar Presenter