Investing in the ASX share market is one of the best ways to start saving for your retirement – particularly in the earlier stage of your working life.
I would go as far as to rate shares as the best asset class to start building wealth and financial freedom given the relatively low capital requirement to start a share portfolio and market transparency.
What this means is you don’t have to take out a bank loan or go into debt to start buying shares as long as you have some savings.
Why shares are a good first investment for retirement
The rules governing ASX-listed companies and their disclosure obligations are also relatively stringent compared to other countries, which help minimise the risks for retail investors (although I am not suggesting they are perfect).
Just as importantly, transaction costs are low as it’s easy and cheap to buy and sell shares, while the value of your investments is easy to track. The same can’t be said of many other assets.
These characteristics make equity markets a great place to cut your teeth as a novice investor, and as your wealth and confidence grows, you can branch out to other asset classes (like property).
However, the share market can be a risky place as fortunes have been lost as much as (if not more) they’ve been made!
3 golden rules to follow
The good news is that the risks can largely been managed or controlled if you know what you are doing and there are three golden rules you should keep in mind even before you buy your first stock for your retirement.
- Assume you will make an early loss
Many new investors aren’t prepared for the market volatility or they fail to recognise how easily and quickly share prices can move up or down.
It is painful to see a stock you just bought fall but before you press the “buy” button, you should prepare yourself for this outcome.
Better yet, you should not look at the share price of the stock in question in the short-term although it is tempting to.
More importantly, remind yourself that the near-term share price movement doesn’t reflect the longer-term fundamental value of an ASX-listed company.
- Keep it simple, stoopid
Investors are often drawn to the latest and hottest stock, even if they do not understand how the company makes money or the industry it operates in.
More often than not, they have read about the stock in an article or someone whispered it to them.
However, buying a stock you know little about isn’t investing – it’s gambling as you are effectively rolling the dice on an outcome you have little understanding of.
It’s one of Warren Buffett’s golden rules of not investing in anything he doesn’t understand. If there is one teaching you should take to heart from the investment guru, let it be this.
Further, it’s not a bad idea to start off investing in an exchange traded fund (ETF) that follows a large cap share index like the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).
This won’t make a 10-bagger investment (an investment that returns 10 times your capital) but it’s a relatively cheap and easy way to gain exposure to the share market.
Alternatively, you can also look at low-cost index funds instead of ETFs.
- Don’t try to pick tops and bottoms
Everyone loves the idea of being able to buy stocks when their share prices are right at the bottom of the cycle and sell at the top.
The reality is that even the best traders struggle to do this consistently so you shouldn’t even think about this strategy as it’s a mug’s game.
More importantly, you don’t need to successfully pick the peaks and troughs to achieve enviable returns over the longer-run as long as you can recognise when a stock is starting to look expensive and cheap based on its fundamentals.
Happy investing fellow Fools!
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.