Owning Shares - The pro's and con's

Australians love to own shares and property. It's almost inbuilt in Australian culture to own a portfolio of both.

Whilst the benefits and risks of owning property is widely understood, investing in shares is often considered to be too complex or risky.

Almost every Australian will have exposure to shares via their superannuation fund however approximately 30% of Australians own shares via other methods.

Let's take a look into the benefits and risks of owning direct shares.

Benefits

1. Transaction costs of owning shares are very small in comparison to other asset classes such as property.

2. There are no ongoing maintenance costs or ongoing fees. Saving one percent of your portfolios value in fees each year can add up to a massive difference in your long term returns and the value of your portfolio.

3. Shares offer great liquidity. At JWM we consider the liquidity of your portfolio to be of high importance. We want to know that should the need arise for you to sell assets quickly you can.

4. One big benefit is that it means that your portfolio can be tailored to your individual goals and objectives. This could include ensuring that you have access to a reliable income stream via dividends or alternatively that you are exposed to less mature and faster growing companies.

5. Unlike most fund managers that have strict mandates regarding the size of positions and number of positions in the portfolios they manage, you do not have these same constraints. It would be ill advisable to hold a portfolio that only contains the shares of 10 banks but if you want to you can.

6. Further to point 5. Everyone has heard of the life changing returns that owning individual stocks for the long term has made for investors. Global companies like Apple, Google and Berkshire Hathaway if held for the long term have produced outstanding returns. Local companies like CSL, the CBA and REA have done the same. However, if you were forced to sell a reasonable portion of your holdings every time the stock become 10% of your portfolio you would have missed out on a large part of the returns of these companies.

7. You know what is in your portfolio. This may not sound significant but during periods where markets fall and volatility is high, it has been our experience that clients who hold direct shares are much less likely to worry about the drawdowns and instead focus on the underlying quality of the businesses they own.

8. You are able to manage your individual tax position unlike with "pooled investments". Often if a fund manager has a large investor choose to redeem funds they are forced to sell holdings to cover this redemption. This creates (hopefully if the manager has performed well) a capital gains tax event that was derived from someone else's actions.

9. Often during periods of volatility many investors look to leave their manage fund, forcing the manager to sell at an inopportune time. By owning shares directly you do not have to worry about other investors forcing your hand.

10. The value of your investments is clearly shown at all times. While at times these prices may become irrationally high or low, you benefit from having transparency over the value of your assets.

11. You are able to take advantage of franking credits, dividend reinvestment schemes, vote in company meetings and are able to treat your investments like a business owner would.

12. You have the ability to avoid investments that you do not want. For example, this may involve avoiding Tobacco, Gambling or Fossil Fuel related companies.

13. You have the ability to decide how diversified you want to be. We recommend always holding a reasonably diversified portfolio but you have the ability to decide if you want to only hold 1 stock or 1,000.

Risks and Disadvantages

1. If you chose not to adequately diversify your portfolio, you will be taking additional risks and your portfolio will experience greater fluctuations in value. In order to minimise this we always believe in holding a portfolio that comprises of various income streams from a wide range of sectors of the economy.

2. Owning shares can require additional paperwork and do require you to be more invested in your investments.

3. It's hard to consistently beat the stock market. The most recent SPIVA Australia report shows that over the last 15 years 82.9% of professional fund managers failed to return performance greater than the Australian share indexes.

4. Most companies that pay dividends in Australia only pay either 6 monthly or annually. This means for an income focused investor, there could be extended periods where you are without an income. Additionally, dividend payments are not guaranteed, during periods of poor performance for the company or great economic uncertainty (like Covid) companies do not have to pay a dividend.

5. Investors can be lulled into overtrading their accounts resulting in additional brokerage commissions and taxes that could have otherwise be avoided.

6. There are now many low cost ways for investors to not only gain exposure to share markets but many of these also "rules based" investments that are able to help you to avoid sectors that do not want exposure to or alternatively provide exposure to themes that would like to invest in.

7. Over history many great and large companies have failed. Blockbuster, Kodak, HIH Insurance, Onetel. If you were to have held a significant portion of your wealth in these companies it would have been a disaster for your financial position.