Advantages of Investing in Shares

Written by Michael McAlary

You may be thinking of investing in the Australian Share Market, but find all the current information negative and confusing. It is true that the Global Financial Crisis and poor financial conditions in Europe amongst other things, continue to impact on the Australian economy. However, it is important to note that investing should be looked as a long term wealth creation strategy, not a ‘get rich quick’ solution.

Below we will take a look at some of the advantages of investing.

Shares often out perform all other major investments1

Over the long term, the Australian share market has repeatedly outperformed other major investments including property. Looking at returns from the 20 years to December 2011, including the impact of tax, costs and borrowings, Australian shares returned 9% p.a.2 against residential investment property returns of 8.1% p.a.2. Cash, (savings, term deposits etc) had the lowest returns of all investments in the same period. Even though it is important to recognise that past performance is no indicator of future performance, it should be acknowledged that for a capitalistic society to function, long term investment returns must be greater than the cost of funds.

Diversification of shares can reduce your risk

A share portfolio means spreading your money across a range of investments i.e. shares in companies from different industries. This approach reduces the volatility (or risk) of your investment fluctuating and should produce more stable returns over the long term.

Shares can be tax effective

A share portfolio can also be an efficient way of generating tax effective income through dividend imputation. Investors who receive dividends will only be taxed the difference between the company tax rate of 30% and their own marginal tax rate since the company has already paid the 30% tax. Therefore, if your individual tax rate is 30% you will not have to pay any tax on the dividends as it is “imputed” that as a shareholder you have already paid tax. If your tax rate is less than 30% you may receive a credit/refund from the ATO. For more information visit the ATO website or speak to your tax adviser.

Shares are liquid

Depending on how you invest, i.e. either directly or through a managed fund, accessing your share portfolio and selling shares is a relatively simple and quick process. You could have your cash in a matter of days compared to owning a property where realising cash from your asset can take weeks if not months. The other advantage is that you do not have to sell the entire portfolio, you may only select a number of shares you want to sell to meet your current purpose. With a property, it’s all or nothing.

A share portfolio can be started with limited cash

A share portfolio can be established for as little as $1,000 with low ongoing commitments. For example, an index fund can provide diversification across the top 300 Australian companies listed on the ASX.

We have talked about some the good points to investing, what are some of the disadvantages?

Shares can decrease in value

As we’ve seen recently, the share market can be volatile which creates uncertainty. However, volatility is only a problem if you are investing for the short term, or if you don’t diversify. In the long term volatility is smoothed and history has shown that investing needs to be considered as a long tern strategy.

Are you still unsure about investing in shares but want to start accumulating wealth?

If you prefer investing in property, why not consider Aspire>. Aspire allows you to invest in both the top performing asset classes, shares and property at the same time in a cost effective way. With Aspire, you can take out an investment property loan and we’ll take a portion of your monthly loan repayment to invest in shares on your behalf. This is a slow and steady way of investing in shares and your share portfolio is in the S&P/ASX300 Index which means it is automatically diversified.

Aspire is unlike margin lending where you are required to invest large amounts and are at risk of margin calls when the share market drops.

1 Source: Vanguard 2013 Index Chart

2 Australian shares returned 9.0% p.a. and 7.0% p.a. at both the lowest and highest marginal tax rates respectively. Residential investment property returned 8.1% p.a. and 6.6% p.a. at the lowest and highest marginal tax rates respectively.

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