Starting to invest in ASX shares as a beginner can seem daunting. There is a lot of information out there. Hopefully, by the end of this article, things will seem a little clearer.
I think a better way of thinking about shares is actually to call them businesses – when we talk about the share market, we're really just talking about the business market.
Shares are not just gambling chips that move around in price for no reason over the years. We're talking about, and are able to buy, small pieces of businesses.
Long-term returns have been good
Past performance is not a reliable indicator of future returns. However, over the ultra-long-term, ASX shares have typically returned an average of 10% per annum. Of course, that's just an average. One year might see a 10% fall and another year could see a 20% rise.
Readers can play around with this tool from Vanguard which shows how well different asset classes have performed over time.
Compounding is a very powerful tool when it comes to building wealth. Compounding simply means when interest earns interest. Over many years, it can build into very large numbers. Moneysmart has a useful compound calculator that people can use.
For example, $1,000 turns into almost $2,600 after a decade of returns of an average of 10% per year. After 20 years it's over $6,700. In 30 years, it could reach $17,449. After 40 years it could grow to more than $45,000.
What to invest in?
That's a key question. There are thousands of different potential investments on the ASX.
Operating companies, listed investment companies (LICs) and exchange-traded funds (ETFs) are all options.
By operating companies, I simply mean a business that tries to make a profit by offering a product or service. Readers may have heard of names like Telstra Corporation Ltd (ASX: TLS), National Australia Bank Ltd (ASX: NAB) or BHP Group Ltd (ASX: BHP).
One way of starting investing is by going with a business that an investor has heard of, and perhaps uses. Names like Temple & Webster Group Ltd (ASX: TPW), Bunnings (owned by Wesfarmers Ltd (ASX: WES)) and Adore Beauty Group Ltd (ASX: ABY) may all be familiar.
But, when investing in individual names, I think it's important for young investors, and all investors, to think long term. Read up on what the business plans are. Listening to investor podcasts or reading websites, like this one, can be useful in learning about companies and generally learning about investing.
Keep in mind the idea of diversification – don't put all your eggs in one basket. Also, volatility is normal, prices of individual shares can move significantly each week. We can view volatility simply – it's the price the market is willing to buy our shares from us, we don't have to accept or worry about that price if we're not looking to sell.
Try to pick businesses that are exposed to different risks, different tailwinds and so on. That way, if something goes wrong for a sector, it's not the whole portfolio that goes down. For example, an investor shouldn't make their entire portfolio banks, buy now, pay later providers, or iron ore miners.
Exchange-traded funds (ETFs)
ETFs can be a good place to get started with investing because they're funds that allow us to buy a whole group of businesses/shares at once, giving instant diversification. Some ETFs are focused on the global share market, such as Vanguard MSCI Index International Shares ETF (ASX: VGS) and VanEck Morningstar Wide Moat ETF (ASX: MOAT).
Others can give us access to ASX shares such as Vanguard Australian Shares Index ETF (ASX: VAS).
Foolish takeaway
Remember that investing is a long-term activity, we should invest with years in mind.
I'll mention a couple of things I try to keep in mind when picking an investment. One is, don't put money into things I don't understand. That way, it's easier to judge the updates that happen.
Another thing I keep in mind is – pick shares that I would want to buy more of if they fell. Don't let price movements decide for you whether an investment is good. I get excited when shares in my portfolio drop in price, because I believe it's better value. If a small biotech, company X which I didn't understand, were to drop 30%, then I'd have less confidence about whether it's worth buying.
Good luck to all new/young investors. Some (easy-to-understand) ASX shares have fallen hard recently because of higher interest rates and inflation, so I think now is a good time to start.
