A banking bust in Cyprus sent savers on to the streets in protest last week and sparked fears of another European crisis. Source: AP
OVER the past couple of weeks we've been putting a bit of a dampener on the hysteria surrounding the sharemarket.
The 10 per cent rise in share values over January and February can't be sustained over the full year despite all the positive news about the boom in retail shares and record highs among the banks.
Our view is that people have been losing perspective. The ripple effect after the banking bust in Cyprus shows just how fragile that boom sharemarket mentality is.
That's not to say share investing should be avoided. Here are five questions to ask yourself before investing.
Where is the market in the investment cycle?
We're great believers in investment history. History tells us that markets always gravitate back to their historic averages.
A sure sign of the top of any boom is when investors reckon "it's different this time". It never is. Booms are always followed by busts and bust always to a recovery.
Do I understand what I'm investing in?
Never invest in a company that you don't understand. Look at the products or services it sells, the quality of its management, consistency of its profit history and dividends.
A good dividend yield can often indicate a company has good cash flow, financial strength, a low share price or a combination of all three.
Strong dividend returns become that much more powerful, especially if they are fully franked. When capital growth is subdued, the addition of a grossed up dividend payment of 6 or 7 per cent is a handy fillip to your overall return.
Do I take a conservative approach to investing?
In a conservative portfolio of shares, investors should be looking for companies providing good income returns.
And with the added advantage of franking credits attached to dividends, investors can also benefit from a reduced tax liability.
The key for conservative share investors should be to maximise these tax-advantaged dividends rather than just growth in share price.
Am I a growth investor?
These are the shares you want to put under the pillow for a few years and watch their share price grow. They will probably see-saw up and down and not offer much in the way of dividends in the meantime.
While offering very good capital growth prospects, these companies will generally be historically well-performed market leaders.
Major resources companies have been leading the way in this group for the past couple of years as they've ridden the commodities boom.
Likewise, major blue chip industrials such as Coca-Cola Amatil and Wesfarmers have provided good profit and share price growth.
Am I prepared to monitor my share investments?
While brokers and financial advisers agree portfolio investments should be undertaken with at least a five-to-10-year time frame, that doesn't mean shareholdings should not be regularly reviewed.
Have a cursory look every three months and a more serious review every year.
Consult your stockbroker or qualified financial adviser for detailed advice tailored to your financial needs before building a share portfolio.
Otherwise, maybe investing through a managed fund is a better alternative.
Threats to shares
* A Euro financial setback from countries bigger than Cyprus.
* US authorities unexpectedly wind back its stimulus.
* China manufacturing turns back down.
* The iron ore price drops below $US100 a tonne.
* A sharp drop in Australian tax revenue.
COMMISSIONS
Take back your share
IT CAN be depressing to think about the secret annual commissions you're paying on investments or financial products organised by someone else in the past.
Now there are several commission-rebating services which can claim that money back for you.
The first was Yourshare, which claims it can save the typical family $1700 a year in commission rebates. A typical trail commission on mortgages is 0.2 per cent, which, on a $350,000 home loan equates to $700 a year. Then there's your superannuation fund. Trail commissions here average 0.5 per cent, meaning $500 a year going begging unless you claim it yourself.
Yourshare will take half of the trail commission it collects on your behalf up to a maximum of $295 a year.
All you have to do is visit their website or call them, fill in a form authorising Yourshare to act as your agent, and that's it. The cash will start flowing.
