Investing Wisely in the Stock Market

By Dale Gillham | Published 12 August 2008 | Last Fact Checked 13 November 2018

Investing wisely in the stock market is a relevant topic in any climate, but it's even more important in times of economic downturn as this is when the best investments can be made for the long term. In my experience, people will spend more time planning their next holiday rather than planning how they can support themselves to build wealth for the future. 

How to invest wisely in blue-chip shares

In general, people will make investment decisions when the share and property markets are running hot but the smart investors know to buy when the stock market is at its worst. After all, you do not want to buy last year's best investment, you want to buy next years.

The benefits to investing wisely in the stock market are pretty simple. You get more choice, more security and more peace of mind in knowing you can fund not only your current lifestyle but, more importantly, your future lifestyle. The biggest mistake is not getting educated. 

I often find people invest without knowing how the investment works, what the risks are and, at times, even not knowing where their money is. People believe that having an employer-sponsored super is enough to fund their lifestyle in retirement, but unfortunately for a lot of people it's not. People also often put money into one investment and don't give it time to grow before swapping their capital into another as they chase high returns.

Investing wisely in the stock market is not about the short-term but rather the longer term and I find investors who continually chase the big returns miss them, simply because they removed their money too early. You cannot chase past returns, but you can position yourself for future ones. 

Diversification is essential for obtaining good returns and lowering risk, but over-diversification kills portfolio returns as it spreads your available capital too thinly. I believe everyone should own at least one investment property and they should invest in a safe blue-chip portfolio of shares they continually add to. Low-risk investments are, in my opinion, the top 50 blue-chip shares on the stock market. 

In my research, if all anyone did was buy and hold the top 10 shares in the market for 10 years they would achieve a better return than most institutional funds over the same period and with lower risk. I would also include residential property as a low risk investment, although it is not a liquid as shares and the majority of managed funds would be considered lower risk. On the flip side, higher-risk shares, the ones outside the top 150 in the Australian market, have generally lower liquidity and are more volatile. 

A disturbing trend that is commonplace in the stock market is that people take high risks with leveraging. But in my opinion they are gambling with their money by over-using vehicles such as margin lending, which if used correctly is safe. Further to this, many uneducated people are trying to profit from Contract for Difference (CFDs), Forex, options, warrants and futures, which are all high-risk investments and require high levels of knowledge and experience to manage correctly. If someone cannot make money from of safe, blue-chip shares, then they should not be taking high-risk. 

Investing wisely is about gaining a solid education

Investing wisely in the stock market is about investing in yourself first by gaining the right education on how to invest. Only buy quality assets and avoid speculating on the next hot tip. Any good investment must have income and capital growth, not either/or. Therefore, I wouldn't consider a bank term deposit a good investment as it only pays income. A term deposit is safe but you won't get rich by investing in it. I would rather buy the bank and get a dividend return and capital growth. After all, if the bank is safe enough to hold my money, why would I not consider it safe to invest in?

To gain the skills and knowledge to ensure your success in the share market click here.

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