Investing in ASX shares is a great pathway we can all take to building wealth. Shares have shown a consistent ability to generate returns that beat almost all other asset classes over long periods of time. But for a new ASX investor, investing in shares can be more than a little daunting.
There are many mistakes an investor can make, and too often, we have to make those mistakes in order to learn from them. As a one-time beginner investor myself, I have made plenty of those. So today, let's discuss five things I wish I had learnt before I bought my first stock, in the hope that any new ASX investors out there can avoid following in my footsteps.
5 things I wish I'd known as a new ASX investor
1. You don't have to start with individual shares
If you tell an older investor that you're just starting out, you might be subject to some recommendations on which types of shares to buy. Perhaps blue chips like BHP Group (ASX: BHP) or Commonwealth Bank of Australia (ASX: CBA) might come up. Or else Telstra Group Ltd (ASX: TLS) or Woolworths Group Ltd (ASX: WOW).
Choosing which investment to start out with can be intimidating. So I wish I had known that you could avoid all of this hassle by just choosing an index fund to start out with. Index funds work by holding the top 200 or 300 shares of the entire ASX.
Thus, you can get a slice of everything without having to choose anything. Some of the ASX's most popular index funds include the Vanguard Australian Shares Index ETF (ASX: VAS) and the iShares Core S&P/ASX 200 ETF (ASX: IOZ).
I didn't start out as a new ASX investor with a fund like this, but I wish I had.
2. Too much of a good thing
Chances are it won't take long for a new ASX investor to hear about the benefits of diversification or 'not putting all of your eggs in one basket'. Yes, diversification is a good thing. It can help reduce your portfolio's risk levels by ensuring that you don't have all of your cash tied up in just one or two corners of the economy.
But I made the mistake of going too diversified when I first started investing. I needed to have shares from every sector and from every country. This could be described as 'diworsification'.
If you do this, it will probably lead to mediocre returns and a lot of hassle. So diversify your portfolio by all means, but don't try and cover every base out there.
3. ASX investors: Never spend your dividends
Compound interest is a marvellous thing to behold – Einstein even allegedly called it the eighth wonder of the world. But the first rule of compound interest is never to interrupt it unnecessarily. Here on the ASX, a good portion of the returns from shares come from dividend payments. Too often, I have seen investors take their dividends and 'treat themselves' rather than reinvest them into buying more shares.
You should never think of dividend cash as spending money. It is there to work for you in perpetuity if you let it.
4. Don't chase fads
This is one of the worst mistakes I see new investors make, and I was guilty of it, too, once upon a time. One of the first things we should all learn about the share market is that there is always a fad – one sector or subsector of the market that everything thinks will be the next hot thing. It could be AI shares, cannabis shares, lithium or copper shares.
You'll see stories of people making fortunes in these kinds of companies, and you will see share prices going to the moon. But like all bubbles, these fads eventually pop, and the money moves to the next hot thing. Don't get caught up in one of these fads. It could (and most likely will) be a painful experience. Money is made on the share market over the long term, not overnight.
5. Keep it simple
Often the best companies are those hiding in plain sight. I always ask myself a few simple questions when looking at a company. Is this company loved by its customers? Is it almost certainly going to be bigger, better and more profitable in 10 years' time? Often it's these kinds of questions that determine what kind of investment it might be, rather than a company's price-to-book (P/B) ratio or MACD chart.
Fundamental analysis has its place, but do also ask yourselves which company's goods or services you use on a daily or weekly basis. That's as good a place to start on your investing journey as you can get.
