Mary Holm: Buying shares? A dollar here, a dollar there - it adds up

These days you can buy and sell shares over your phone, and invest even small amounts. Photo / Getty Images

OPINION:

Q: I read in the Herald this week that more Kiwis are investing in shares than bank deposits. I think that's fantastic.

But here's my question: these days you can buy very small parcels of shares, and even invest as little as a dollar in the share market. It seems to me that it would be far better to buy a decent number of shares, say $1000 worth. That way you get a decent income from the dividend each year.

You can't get rich buying a dollar's worth of shares can you? Is it worthwhile for the kids to own such a small amount?

A: They can get rich in knowledge. I would rather see the young ones — and inexperienced investors of any age — putting $1 into a single share than $1000. If they have $1000, it would be great if they spent $1 on each of 1000 shares.

Okay, perhaps that's a bit exaggerated. But the ability to invest tiny amounts means:

• The sharemarket is open for those with little money.
• It's easy to spread your money over lots of shares.

With many $1 investments, some will turn into $20, others will go down the gurgler, and the majority will jog along — sometimes losing value but more often gaining. The investor will learn so much.

That's far more useful than feeling discouraged because your single $1000 share investment became worthless. Or feeling elated and proud of your share-picking ability because your single share grew fast.

Too many people who have beginner's luck attribute it to their skill, and then put lots of money into one or two more shares they think will be winners.

Sooner or later they will realise that it's almost impossible for part-time investors to beat the professionals at discovering undervalued shares — the ones that will grow faster than the market as a whole. But it could be an expensive lesson.

Buy! Sell! Does it pay?

Q: You commented recently, "Hey — share prices will (recover) too!" To me, in a humorous fashion, you might be contradicting yourself? Many years ago you published my letter in which I said, "One has to actively play the sharemarket! Buy on the downturns! Sell on the upturns! Be counter-cyclical!" Your reply was: "Buy in, stay in for the long-term — 10 years. You will come out ahead!"

I still disagree! I think you are now saying what I said: "Hey — share prices will rise too." Regardless, shares can be sold the same day, sometimes at a loss, but remaining cash instantly available, by contrast property cannot?

You only want to cash up if you are "caught short!". In the words of the first sharebroker I dealt with, the smallest in the Yellow Pages category, after questioning us as a young married couple, "Only invest money you are prepared to lose, and can lose!"

A: I hate to disappoint you, but I haven't changed to your way of thinking.

My comment about share prices rising was intended to comfort people worried about the decline in the value of their share portfolio or KiwiSaver fund. If you hang about, the prices of most shares will recover.

But that doesn't mean it's clever to trade shares often, trying to time the market. Research shows people who do that on average do considerably worse than the buy-and-hold brigade.

Your last paragraph says a lot. The broker was correct that if you are playing the market you should invest only what you can afford to lose.

But if you are investing for the long haul, there's no need for such negative thinking. As long as you are in a KiwiSaver or other managed fund, or you own many different shares, you can be confident your investment will grow over 10 years or more.

- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.