Making your first buy into the share market is scary for many first-time investors.
Over the last five years it has been ‘normal’ for our share market to fluctuate up to plus or minus 15 per cent in value over any three month period.
The thought of losing 10 per cent to 15 percent of your investment in the first few months of entering the share market has stopped many potential investors from entering into the market at all.
With the return on cash so low, how do investors make a sensible entry into the share market?
I’m going to look at three methods for how an investor could have started a $100,000 share portfolio over the last two years – two years in which the overall market price index has pretty much gone sideways.
In all examples we are investing into the iShares S&P/ASX 200 Exchange Traded Fund (ASX Code: IOZ).
Method 1: Jump in all at once.
Just jump in an invest $100,000.
Had we invested $100,000 in July 2015 that investment would be worth $100,623 after two years. An annualised rate of capital growth of 0.31 per cent.
Over the last two years we would have received $9,815 in dividends.
Our total return has now been 4.91 per cent per annum.
Not bad given the capital value has gone sideways and we still would have beaten the return that would have been received from cash.
However, at its low point your initial $100,000 investment would have been worth $85,587 in February 2016 – a 15 per cent decline after only eight months into your initial purchase.
How many first time investors would have sold out at this point and crystallised a loss?
This shows that investing in the share market is not a short-term project.
Method 2: Invest a chunk every six months.
Another way to have entered the market would be to start with an initial tranche of $20,000 and then invest another $20,000 every six-months after that.
This would help to reduce the chances of experiencing such an unrealised loss so early in the piece.
This approach would see an end capital value of $104,261 after two years.
An annualised rate of capital growth of 2.61 per cent per annum.
However, as we held fewer units earlier in the piece, our total dividends amount to $5,091.
A total return of $9,417 or a total annualised return of 4.71 per cent.
Not too different to our first method of jumping in all at once at the beginning.
Method 3: Average in a little each month.
Our third option is to have chosen an equal amount to invest every month over the last 24 months.
This would require a monthly contribution of $4,150 per month irrespective of what the unit price of the ETF is at – or what the share market is doing.
Using this approach, our end capital value would be $106,333.
Total dividend for the period amounts to $5,120.
Thus, our total return is $12,108 for the two years with an annualised return of 6.09 per cent.
Not bad for a share market that has gone sideways in two years.
Secondly, we have almost trebled our return compared to having the same amount of cash in a high interest cash account.
Making small steps into the share market will smooth out the volatility and can produce a nice return.