Top 5 things investors must know about shares

A good-quality share portfolio is a must for any investor wanting diversification in growth assets.

Canstar asked Felicity Cooper, Equities And Derivatives Adviser and Authorised Representative of RBS Morgans Limited to nominate five great things that investors and would-be investors should know about shares.

1. Their long-term performance is terrific

“According to the recent ASX Long-term investing report, not only has the long-term performance of Australian shares been terrific, it’s been the best performing asset class over the 10 years to December 2012,” says Felicity. “It’s been the only asset class where super funds have been able to maintain returns of over 9% per annum over that period, and has the added benefit of being a liquid market, where you can have access to your funds in 4 working days.”

Click here to compare how various asset classes have performed over the past 30 years.

2. They can be a fantastic source of income, via dividends

Unlike term deposit rates, which have been falling as the RBA lowers interest rates, the income paid on Australian shares has historically grown at an average rate of between 5-6% each year.

3. They can be tax-effective

“Since a company has already paid tax on its earnings (at a rate of 30%) a lot of dividends received from Australian shares come with a franking credit for that amount attached to the dividend,” explains Felicity. “If your tax rate is less than 30% you only need to pay the difference between the 30% and your tax rate. If your tax rate is under 30% (and especially for superannuation funds) you can get that imputation credit refunded by the tax office.

Effectively it means that a 5% fully franked dividend is really worth 7.14% on a grossed up basis. Much better than the interest that you can earn in a savings account at the moment – that you then have to pay tax on.”

4. They are essential for diversification

The old saying “don’t put all your eggs in one basket” is still great advice. “While it’s a great idea to have cash on hand for a rainy day, the cash you have in your account has no opportunity for growth over and above the income it earns,” says Felicity. “A right balance of cash, shares, international equities and property can give you the best returns dependent on how much risk you’re happy to take.

Likewise, within your share portfolio, it’s also important to have the right mix of different companies, with the balance of income and growth that suits you.”

5. They represent our economy

Felicity points out that we all indirectly support shares every day, as all of the shares listed on the Australian share market have business in the country. “Whether it’s the bank you bank at, the grocery shop down the corner or the fertilizer you put on your grass at home – all of these are companies that you have the opportunity to own a piece of,” she says.

“Like the economy, there are always going to be businesses that are better than others. The trick is to find the sectors of the economy and businesses within them that have good management, strong fundamentals and the prospect for growth.”

As always with any investment decision, it’s important to seek professional advice tailored to your personal circumstances. But – don’t be reluctant to ask your adviser about the pros and cons of investing in shares. You might be pleasantly surprised at the benefits potentially available.