9 questions to ask yourself before investing in shares (2024)

What plans do you have for home ownership?

The best tax shelter is your family home. There is no tax payable on any capital gains and it is excluded from the assets test for the age pension. Owning a home outright also dramatically reduces the annual income you need in retirement.

If you don’t already own a home, it’s worth considering as an major objective. If you think you might buy within the next five years, share investing may not be the best savings vehicle for you. You don’t want to watch your shares plummet just as you’re ready to buy. Look into the government’s First Home Super Saver Scheme, which allows you to save inside of super and enjoy the tax breaks.

Do you have credit card debts or personal loans?

If so, pay them off before you start investing. If you’re paying 20 per cent interest on a credit card, that’s an easy 20 per cent return on your money for paying it off.

Do you know your expenses and ‘investible surplus’?

If you’re frittering away money paying too much for utilities or spending in mindless ways, there are bigger savings to be had! Tracking your spending helps you to plan ahead for large or irregular expenses. Knowing how much money you have left over also tells you the potential “investible surplus” you have for share investments. Well worth a bit of time to track.

Do you have 3-6 months of living expenses?

Tracking your spending will give you the answer to how big your emergency fund needs to be. No-one wants to compound the pain of a job loss or sudden drop in income by having to potentially liquidate their shareholdings during a downturn. The money you invest should be cash you don’t need to touch for years. So, make sure you have saved 3-6 months of living expenses.

How will you feel if shares drop 20-40 per cent?

Imagine a scenario where you buy shares and the next day they begin a precipitous fall of between 20 and 40 per cent. This happened only last year during COVID-19. Will you panic and sell in the hopes of avoiding bigger price falls, but then also be too scared to buy back in? If so, think about whether long-term share investing is for you.

What is your investment horizon?

I am investing my money with a view that I won’t need it for at least 15 years. This gives me confidence I will be able to ride out any sharemarket volatility. If you’re closer to retirement or hoping to use the money to buy property soon, you may want to consider a less risky place to invest.

How much will you be investing and how regularly?

This will influence what type of broker you choose to use to do your investing. “Brokerage and fees play a major role in your investment performance, and is critical to consider with smaller balances,” says Morningstar’s Jayamanne.

It is possible nowadays to pay as low as $5 per trade. Opentrader charges $5 per trade under $5000 (it’s higher for bigger sums). ThinkMarkets charges a flat fee of $8 per trade regardless of size. SelfWealth and Pearler also charge a flat brokerage fee of $9.50 (and Pearler also offers $5 trades on some ETFs).

But even at these low rates, on a $500 purchase, that’s still a fee of between 1 and 2 per cent.

I’ve figured out I will be investing about $1500 a month, so I’m happy to cop one of these lower cost brokerage fees. For smaller amounts, you can consider apps like Raiz, Commsec’s Pocketbook and Spaceship.

Have you thought about index funds?

ThinkMarkets general manager Harley Salt says many first-time clients are attracted to buying Exchange Traded Funds (ETFs) which track a particular benchmark sharemarket index, such as the S&P/ASX 200.

“ETFs are the go-to investment option of new investors, one reason being they can get instant diversification, something they cannot get with putting $1000 into a single stock. Index trackers also typically have lower management fees compared to the actively managed funds,” he says.

My purchase this week was simply another bite at the ETF that I already own. My plan going forward is to continue tracking my spending and invest my monthly “investible surplus” in the first week of the following month.

Investing regularly this way will effectively “dollar cost average” my sharemarket buying at regular intervals. I’ll keep you updated!

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circ*mstances before making any financial decisions.