Beginner Investor - Looking for some answers, 17198305, page-6 - HotCopper | ASX Share Prices, Stock Market & Share Trading Forum

Originally posted by Benjiman ↑

Hi, I'm Ben.
I have no experience in the stock market, I have no financial background experience, I didn't study anything at university. I work as a Desktop Support Technician. I don’t know anything about how this works and I find whenever I try to search for the details of how it actually runs… I'm just presented with 101 people suggesting me to subscribe to their newsletter and stock choices for 200-2000 per year. I apologise if this is a stupid question in advance.

I'm looking to be able to invest a portion of my earnings into the stock market. I can't afford a deposit for a house so instead of letting my money sit in a bank earning basically nothing I figure I can turn to the stock market to help me achieve that 20% deposit number quicker.

In all the reading I've done about how to invest in the stock market, I consistently come across the terms index tracking funds and how they regularly outperform over 80% of the managed funds on the market, mostly due to the high management fees of the managed funds.

But then when I try to read into the details about these index funds, it once again, is just a labyrinth of someone trying to sell me something. The main question I have is;
How do these index tracking funds outperform managed funds when the charts look like this. (Like I said, I apologise if this is just an outright stupid question.)

So... The way I understand it. If I started my investing in approximately the start of 2010... Which is just a random time in history that the share price/value of this tracker has been the same as it is as I am writing this question.
If I invested $500 per month for 6 years, that's 6 grand a year. ASX:STW says it is currently paying 4.16% dividend. which is approximately 250 bucks. But the price didn't even make the whole of 2010 before dropping, so you're not even getting 4.16% on $6000, you're getting even less than $250.

What I FAIL to see, is if I invested 500 of my monthly earning into one of these funds since 2010, how would I have actually made ANY money? Dividends could go up and down, value of the share could go up and down, but it all ends up at the same place. what did I make in 6 years? 1k-2k-3k on dividends?

I see investment funds that say; invest 10k today and make monthly contributions of 500, and in 5 years your investment fund will look like this 100,000-200,000. But the leading investors of the world day index funds. Big risk guys say small cap stocks.

I don't have a fancy job or any family money, I just want to be able to be able to say I don't have any issues with money by the time I'm 30 (8 years to go)

Thank you for taking the time to read this and help me.

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Dear Ben,

This forum seems to have ignored your wonderful question for weeks, so I hope I could assist in my own limited way. I am going to answer these questions in term of ASX and Australian stock market, because it is what I am familiar with; but it is generally applicable to any country's stock market.

Let's begin with the disclaimer that although I am a certified CPA for more than 10 years, I am merely but a hobbyist; a stupid amateur when it comes to investments. I understand the theories behind what makes a good investment and the different methods of valuation of a company; but I lack the mental discipline to control my "gambling" habits. Which is what Warren Buffett often said: you don't need extremely great IQ to be a great investor, just a solid mental framework and the discipline not to let your emotions destroy that framework.

What is a stock / share?

Stocks or shares are partial ownership in actual businesses. That is the first thing that you have to remember when you are buying a share. You are not punting on some horse in a race track. There is an actual company; and you are buying a partial ownership, usually a very tiny one, in that company.

How to behave when share prices fluctuates

One of the most common complain against investing in stock market from people who usually invest in bank deposit or property is that the price fluctuates too much. That is because there are too many people who are in the market for a quick profit; and make no mistake; stock market can be a fun casino if you want it to be; but like any casino; the odds are - you will end up poorer than before you started.

So instead of focusing in fluctuating stock prices, always focus on the company behind the stocks. Companies are big entities. They change super, super slowly. Forget about day by day or even minutes by minutes fluctuations in price; focus on how the actual companies will be doing months, years, decades from today. That is how you can make consistent money in the stock market: by owning good companies , purchased at reasonable price, for a reasonable length of time.

What is Index Tracking funds, and how does they outperform 'active' funds?
There are probably around 2,000 companies listed in Australian stock market. Our market is tiny, and objectively speaking our companies are not the best in the world in most industries; but it stills provide a good 7% return a year on average in the past few decades.

'Active' funds attempt to choose the best companies from these 2,000 companies; while index funds just buy every companies (usually ASX 200, or 200 largest companies in Australian stock exchange). Why does buying every company beats buying a few companies?

The return of ASX200 (on average around 7% a year) is the return of all companies in the market (or at least 200 largest one). Some companies will go badly and bankrupt, some companies will do very well and doubles and triples in value. By buying all companies, the index funds achieved 2 things: 1) They minimize the brokerage and management costs 2) They always guaranteed to achieve average return because they own everything that is part of the average.

Active funds on the other hand, maybe either highly successful (above 7%) or done very badly (bankrupt, like some of my superannuation funds!). But on average, they cannot beat index funds because by law of mathematics, it is impossible for everyone to be above average.

What is Dividends, and why it makes you money?

Stock market is a zero sum game. If I make money, someone else have to lose money (by buying my stocks at higher price, or by selling stocks to me at lower price). The only exception to this rule is dividend. When a company makes profit, it pays out a certain percentage of that profit as dividend. When a company pay dividend, no one loses money. The whole investors as a group have more money to spend. There are a lot taxation rules about dividend imputation and franking credit etc, but your tax accountant should be able to sort them out easily.

Anyway, just the basics as requested. Good luck.