Over the weekend I was reading through a well-known Australian investing magazine and came across some advice from a money 'expert' that could be dangerous to an investor's wealth.
A person whose husband had died, had been left with a substantial sum of money to invest, but had never before invested in the stock market, was seeking advice about what to do with their windfall. While the investing 'expert' did firstly suggest that the person might want to seek financial advice, he then went on to say that it would be a good idea to let a professional manage the money.
Both of those suggestions are wise, especially for someone who had never invested in the share market and said they had no idea where to start.
But it was the so-called expert's third suggestion that left me cold.
"Buy a few well-known companies, including a bank or two and a supermarket retailer along with a resources company" is not the best advice for someone with no experience of the stock market, and likely no knowledge of the stocks they were buying.
While I realise the advice from a magazine is hardly comparable to what a licenced financial adviser or planner would offer, it seems to me a dangerous statement for the expert to take. Some of the issues as I see it are as follows:-
- There are hundreds of different resources companies on the ASX, how is the person seeking advice who has never invested in the share market going to pick one?
- While the big four banks operate as an oligopoly, there are subtle differences between them. ANZ Bank (ASX:ANZ) has expanded into Asia significantly more than its peers, while Commonwealth Bank (ASX:CBA) has the largest share of Australia's mortgage market.
- While many investors (and non-share market investors) know that Woolworths Limited (ASX:WOW) owns Woolies supermarkets, not everyone knows that Coles is owned by Wesfarmers Limited (ASX:WES), or that IGA stores are associated with Metcash Limited (ASX:MTS).
And then there are the other issues that need to be considered. There's not much point buying Woolworths shares if they are expensive, so an investor sees little or no growth and a relatively low dividend yield. How much should the investor allocate to each company?
But perhaps the biggest issue is the investors' appetite for risk. Someone who hasn't invested in the share market before and over the age of 50 is likely to favour stability and be a low-risk investor (of course I could be wrong). Investing in the stock market requires an investor to be able to cope with volatility, not sell out the first time shares fall 2% in one day, and also be able to sleep at night.
Foolish takeaway
I hope that the investor followed either of the expert's suggestions to let a professional manage the money or get proper financial advice. Investing in the share market with little or no idea of what you are doing can be hazardous to your wealth. Of course, should the investor still want to go ahead and invest in the stock market, the Motley Fool has guides on how to get started, as well as a wealth of information on our website to help new investors.
In the market for high yielding ASX shares? Get "3 Stocks for the Great Dividend Boom" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!
More reading
- Just how low will the Aussie dollar go?
- Super fund members paying $20bn in fees
- Discounted stocks for the falling Aussie dollar
- The best overlooked energy dividend play?
Motley Fool writer/analyst Mike King owns shares in Woolworths and Metcash.
