Investing in shares isn't for everyone.
In fact, 6.48 million Australians own shares.
With around 24.3 million souls in our great country that means approximately 27% of us own part of a public company.
But how many of those people could tell you what shares actually are?
According to a 2014 study by the ASX, less than half (43%) of all people who own shares directly understand how the sharemarket works.
That means 43% of those people who own shares could not even tell you how it's going to help them.
It's a pity. It really is. Because you see the Australian sharemarket has returned more than property, term deposits and bonds over the ultra-long-term. According to Vanguard, Australian shares, similar to those included in the S&P/ASX 200 (INDEX: ^AXJO) (ASX: XJO), have returned an average of 9.7% per year since the start of the '70's.
Are you a bad investor?
In general terms, we complain if a professional investor can not beat the market over time.
"What am I paying you for?" they scream down the phone. "You know, I can just stick my money in a term deposit and be done with it!"
It's been shown that around 80% of fund managers underperform the market over 10 years. However, if you ignore fees many will outperform.
For individual investors, there's a saying that if you can get six out of every ten stock picks right, you are good. Peter Lynch, a famously successful fund manager ironically, coined the phrase. He said, "You are never going to be right nine times out of 10."
6/10, 5/10, 4/10? Where and when do you finally get to a point in the sand, draw a line and say, "Enough, I'm just a bad investor."
If you've been in the sharemarket long enough you would have experienced this feeling more than a few times. Sometimes it feels like nothing's going right.
Studies have shown we feel the pain of loss greater than the joy of gains. Fair enough, too. Mathematically, it hurts more. If you lose money now, you are guaranteed to make less in the future with the same returns.
I believe all new investors should start out with less than they can afford to lose in the sharemarket.
Let me explain.
For the first few years, you should invest 95% of your money in active investment funds (managed by professionals), such as the ones offered to the public by Magellan Financial Group Ltd (ASX: MFG) or Macquarie Group Ltd (ASX: MQG); and index ETFs, like those offered by Blackrock, Vanguard and Spdr.
Read their monthly and quarterly reports, watch their videos, etc. Do that for a couple of years and you'll soon have an understanding of how the market works and what the pros look for when investing.
With the other 5% of your money, try your hand on the open market. Do some research and buy some shares you like. See how you go.
But if after four or five years you realise things are not working out for you, you should do one of two things:
- Sell your shares, close your account and invest in managed funds
- Get advice — you can use online stock picking services like ours or someone else's. Just follow them for a few years and see if it improves your returns. If not, take the first option.
Foolish Takeaway
In my opinion, the last thing you should do is give up on shares altogether. They'll be here whether you like it or not. They'll go up and down and shatter people's hopes and dreams of a quick dollar.
But over time shares have proven to be hands-down the best investments you can make.
You don't have to be a 'good' investor to make a lot of money in the sharemarket.
