The real value of investing in shares
Australian and international shares form a very important part of a well-diversified portfolio. The percentage of your portfolio that you invest in shares will depend on your investment timeframe and your tolerance to the volatility of the share market (risk tolerance).
Many investors are concerned about the volatility of share investments. It’s true that shares can be volatile over the short term – you can buy and sell shares several times a day, usually at a different price.
As such, shares are best suited to investors with a minimum investment timeframe of five years. For such investors, short-term volatility isn’t important. What is important is that:
- Shares tend to regain any short-term lost performance and generally outperform all other asset classes over the long term
- Shares can provide long-term capital growth
- Shares can provide a strong and growing income stream
By not investing in growth assets such as shares, you face the greater risk of earning less than inflation or not effectively diversifying your assets.
Shares can provide capital growth
Shares can provide long-term capital growth through increases in the value of share prices.
When a company makes a profit, it must decide how to distribute the funds. For example, it could pay a portion in dividends, or reinvest 100% back into the company to finance expansion, new technologies or equipment.
This ability to reinvest in the company to foster greater growth and future profit can result in higher share prices – the benefit of which is passed on to shareholders.
Also, as a company’s profits improve over time, demand for the company’s shares increases, pushing up share prices and providing further capital growth.