of investment is another important consideration when deciding which asset class to invest in. Look at how hard it is to enter the asset class and what processes you need to go through when you decide to exit. For example, if you know how difficult it can be to find a suitable investment property, negotiate the price and arrange settlement, you will be pleased to find out that establishing an account with a stockbroker is as easy as opening a bank account. Having opened your account, you can buy and sell shares by giving instructions to your stockbroker over the telephone. Alternatively, you can use an online broker. Share prices are listed daily in the major newspapers and may be accessed online. ASX operates from 10 am to 4 pm Eastern Standard Time, Monday to Friday (excluding national holidays).
The ASX trading calendar, market hours and trading phases can be found on the ASX website: www.asx.com.au.
Investments with high liquidity not only make investing easier but, by allowing you to exit your investments easily, provide you with greater access to your money should you need it.
Share prices are determined by the buyers and sellers through the power of supply and demand, and trading may take place instantaneously. There is usually a healthy number of buyers and sellers for shares in most of the major companies. These are known as liquid stocks. However, the Australian market is noted for having a ‘long tail’. This means that liquidity is quite concentrated and can trail off considerably outside the top 200 companies (and sometimes for stocks, within the top 200). You can readily determine how liquid the market for the shares in a particular company are by monitoring how many shares are sold on a daily or weekly basis. Another test of liquidity is how wide the spread is between the bid (the highest price people are prepared to pay) and the offer (the lowest price people are prepared to sell at). When there are lots of buyers and sellers, both sides compete to get their trade done so buyers are prepared to pay more and sellers are prepared to accept less, resulting in a narrowing of the bid/offer spread.
Interest-bearing investments also have a degree of liquidity. Generally speaking, the least liquid asset class is property: investors in this asset class may need to wait for the opportunity to realise any capital gain.
The minimum investment for a particular asset class is another important consideration, as the amount required may prove to be prohibitive for some investors. In the case of share investment, some stockbrokers will accept an initial investment of as little as $500, but bear in mind your transaction costs (principally brokerage) if intending to make repeated small investments (see the section on ‘Costs’ that follows). Cash investments and managed funds also have low entry levels. While direct property has a higher entry level (usually at least $150 000), you can gain exposure to property using much less capital if you invest through a property trust (there is more on property trusts later in this chapter).
Investments often involve transaction costs when you buy or sell, as well as ongoing costs of ownership, and these must be taken into account when comparing asset classes. Transaction costs for direct sharemarket investments include brokerage payable to your stockbroker plus GST. There is no stamp duty payable on share transactions and there are no ongoing costs for direct sharemarket investments.
For other investments, transaction costs may include government charges, real estate agent commissions, entry and exit fees for managed funds and bank charges. Ongoing costs may include building maintenance, rates and letting agent fees, fund management fees and account fees.
The time frame required for your investment to perform is also an important consideration – some investments are better for long-term goals and others are more suited to short-term goals. The key determinants are the time left until the particular investment reaches maturity (the point at which you will be able to sell it) and/or the time required for it to perform to the desired standards.
Generally, shares do not have a maturity date and can exist for as long as the company is in operation. This means you can invest by taking a long-term view on performance. On the other hand, you can also take a short-term view. Day-traders aim to have opened a position and closed it out within the day, hence the name.
Property is generally considered as more of a long-term investment.
Two further considerations when determining the time frame you are prepared to accept for your investment to perform are the time it takes to invest and market timing.
Time it takes to invest
While ease of investment has already been discussed, the time it takes to be able to invest is also an important consideration. It takes time to learn to invest effectively – that is, time to learn about your investment alternatives, time to make investment decisions and time to manage your investments thereafter. Many people feel it is easier to invest in areas such as the cash market or managed funds than in areas such as property and the sharemarket.
Depending on the amount of time you have and your level of interest, you can:
• make all your sharemarket investment decisions by yourself
• rely more on the advice of your stockbroker
• make an indirect investment through a reputable fund manager.
The same applies to property – you can either research and decide on specific properties directly, or invest indirectly via listed or unlisted property trusts.
Of course, investment decisions become easier as you gain experience and learn more about the factors affecting your investment.
Timing
The timing of your investment in a particular asset class is also something to consider. Timing is particularly important when deciding when to buy or sell an investment in markets that have poor liquidity (a relative lack of buyers and sellers), as this characteristic tends to produce large price swings. Timing is also important for investors pursuing short-term investment returns or wanting to lock in capital gains. However, as most share investors are in the market for the medium to long term, the issue is not so much one of market timing as it is of their willingness to let time pass.
The companies listed on the ASX include a number of large overseas-based companies. More than two-thirds of the listed companies are industrial, which includes businesses such as banking and retail. The remainder are part of the resource sector, which includes mining and exploration. Many listed companies are household names – for example, BHP Billiton, Westpac, Woolworths, Telstra and the Commonwealth Bank.
As an alternative, managed funds are popular because they provide investors with a cost-effective way to spread (diversify) their investment throughout local and overseas sharemarkets, as well as over other asset types, such as property and cash.
Another possibility is the growing range of exchange-traded products, including exchange traded funds (ETFs), which can give you quick exposure to a range of diverse assets with relatively low management fees. We talk about these more in chapter 10.
As well as internal diversification, another factor to take into account is which asset classes enable you to spread your investments over different levels of debt. The movements of interest rates paid and charged by banks have an effect on us all. For instance, if your bank increases its interest rates, the repayments on your mortgage are also likely to increase. Like most individuals, companies listed on the sharemarket have debts that need to be serviced. These debts, like a mortgage, are susceptible to movements in interest rates charged by the lender.
Direct property investment may offer fewer opportunities
