Shares are an investment that can be used to build wealth. However, we find that some people are apprehensive about investing in shares due to the risks involved; both real and perceived.

Like any other investment, shares have a level of risk – shares prices will go up and go down. However the problem with shares, unlike property is that they are re-valued everyday via the stock market. It is probable that if houses were valued daily, they too would fluctuate in price.

Let’s think about this from another angle… Most people invest their hard earned cash (or borrowings) to purchase a car without even stopping to consider the risks of this investment – Around 30% of your new cars value is lost as soon as you drive it out of the showroom [source: http://www.shedrives.com.au/finance.php]. And how much would the car be worth in 5, 10 years time? Probably nothing!

Most people are willing to take this risk on a car, but not on investing in shares. Cars are a depreciating asset; however shares are a growth asset, that have the potential to grow in value over the longer-term.

Alternatively, you could invest in cash, term deposits and/or government bonds. Unlike the car example above, the initial capital you invest will be more secure and you will also generate a small amount of income from the investment, this could be around 4% to 8% depending on where the funds are invested.

Cash and fixed interest products may be suitable for a short-term investment, but is it suitable over the longer-term taking into consideration the effects of inflation? We all know that $1 today will be worth less than $1 tomorrow. Currently inflation hovers around the 4% mark, making your net return from your cash investment anywhere from 0% to 4%. Please note that the tax payable on this income has not been considered, which would decrease the real return further. This highlights that although cash and fixed interest investments are ‘less risky’ their value can be eroded by inflation over the long-term.

ASX and Russell conducted a research study to compare the long term performance of different asset classes over the last 10 and 20 years. Over a 20 year period the Australian shares sector has outperformed all other investment sectors after allowing for taxation and expenses. The top performing assets were Australian shares, Australian residential property and Australian and Global listed property.

Although past performance is not a guarantee of future returns, it does show that over the long-term growth assets including shares, have the potential to provide higher returns for investors. You can find this report at http://www.asx.com.au/about/pdf/asx_russell_long_term_investing_report_2007.pdf

Let’s now look at some common fears preventing people from investing in shares;

1. I don’t understand shares
Basically, when you purchase shares, you are a part owner in that business and you share in its profits. The value of your share (like most businesses) will depend on the company’s profits, operations, the strength of their management team, the ability to compete with other participants in their industry etc.

There are plenty of ways that you can build your knowledge up on shares; surf the ASX website, attend share seminars, speak to your advisers (brokers, financial advisers, etc.) and read books, newspapers and magazines.

You could also set up a dummy share portfolio on www.tradingroom.com.au where you can track a number of stocks over a set period of time. By watching your pretend share portfolio, you can develop an understanding of what drives the shares value and become comfortable with the volatility (fluctuations in share price) in the market.

2. I don’t want to lose my capital
With shares, there is the potential that you could lose your capital. However you can put in some safeguards to help limit these potential losses;

1. Don’t put all of your eggs in one basket (diversify your portfolio) – By spreading your portfolio across a range of investments that behave differently under different market conditions you can reduce the overall risk of your portfolio.

2. Match your objectives with realistic timeframes. If you are investing for retirement which is in 30 years time you can easily ride out a five year market slump. Write down your investment goals as this will help you focus on your goal and make it easier to manage your emotions like fear, anxiety and greed.

3. Look at Blue Chip shares – these are companies with long histories of growth and stability. Blue chip shares usually pay regular dividends and generally maintain a fairly steady price trend.

3. I don’t know when the right time to buy is
There is a common myth that investing is about ‘timing the market’ i.e. getting in before prices rise, ride the upward trend and then sell out of the position before prices fall. In theory this sounds good, however no one has a crystal ball that knows when prices are at the lowest or when share prices have hit their peak. Unfortunately, even economists and other financial experts cannot accurately forecast market movements consistently. However, by buying and holding over the long-term you can ride these waves, which is better than trying to time the market. The point is that its time in the market that counts, not timing the market.

4. I fear that I will buy the wrong shares
Market research will help you select the right shares. Read company reports, financial media and analysts’ research. There are many factors that influence demand for a company’s shares, some related to past and expected performance, others tied to global or domestic economic conditions.

Again, look to diversify your portfolio across a number of stocks so that you are not relying on one stock to realise your financial goals. Consider starting out with a small amount invested in a few blue chip type stocks and as you become more comfortable you can increase your holdings.

An alternative is to look at using a share broker or investing in managed funds. A broker can provide you advice on portfolio construction and develop a share portfolio for your situation. Under this scenario you actually hold the stock in your own name. A managed fund on the other hand, will pool your money with other investors and invest your money in shares (they also invest in other asset classes) according to their investment style, stock research and expectations of the market.

5. Investing in shares is too time consuming
Like any investment, it is important to do your research so you can make an informed decision. If you are time poor you can look to out-source this to a share broker and/or managed fund. You will need to look at the costs of doing this and ensure that you can trust these people to invest your funds wisely.

6. I fear a stock market crash
Over the past 50 years, the Australian share market experienced what was generally regarded to be a bear market (decline in the market of 20% or more over at least a two month period), on average, once every five years (Vanguard: Realistic Share Market Expectations).

Again no one has a crystal ball and can predict the timing of a bear market; however an investor should remember their goals and time frame and be prepared to ride it out. The biggest danger in a bear market is that an investor will panic and sell at or near the bottom of the downturn.

The ASX website that shows the movements of the S&P/ASX All Ordinaries Share Price Index over the last one hundred and five years http://www.asx.com.au/investor/pdf/share_price_movements.pdf

From this chart, you can see that the share market as a whole has progressively moved in an upward trend, despite market crashes, world wars, terrorist attacks and Tsunamis.

7. I am uncomfortable borrowing money to buy shares
The main reason investors borrow money to buy shares and/or property is so that they can increase the amount of money working for them in the market and potentially increase their returns. Obviously the more money you invest, the greater the cash return you can receive for every percentage point of growth or income your investment generates. However the more you invest, the greater also the potential loss you can make if the market turns against you.

There are ways that you can manage risk;

• Gear at a level that you are comfortable with

• Have a buffer in place (ensure that your investment structure is set up appropriately to cover interest repayments and any potential margin call if you have a margin loan).

• Look again at the fundamentals of investing – investing over the long-term and diversification.

• Look at having adequate insurance cover in place (such as life, total and permanent disability, trauma and income protection insurance) to protect your income.

At the end of the day, shares prices can fall in value and rise in value, adding risk to your investment portfolio. However, as discussed above there are ways that you can reduce the amount of risk in your portfolio through diversification, considering blue chip stocks, investing over the longer term, having buffers in you budget and doing your research. However the trade off for this risk is a potentially higher return, which could increase your investments and potentially allow you to reach your financial goals sooner.

Background information
Wealthyfrog provides neutral expert coaching geared towards helping people achieve financial freedom for life. Wealthyfrog does not sell any investments and has no bias to any particular investment area or strategy.

For more information
Wealthyfrog York Street Sydney (02) 8006 4866, email tina.tran@wealthyfrog.com.au website: www.wealthyfrog.com.au

This material has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this material is General Advice and does not take into account any person’s individual investment objectives, financial situation or needs. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement (“PDS”) relating to the product and consider the PDS before making any decision about whether to acquire the product.

Any references to past investment performance are not an indication of future investment returns.

Although every effort has been made to verify the accuracy of the information contained in this material, Wealthyfrog AFSL Pty Ltd, its officers, representatives, employees and agents (“Wealthyfrog”) disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this material or any loss or damage suffered by any person directly or indirectly through relying on this information. Wealthyfrog has no associations with the financial product(s) or service(s) mentioned in this material.

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Tina Tran is an authorised representative of Wealthyfrog AFSL Pty Ltd, Authorised Representative number 327608.