Shares looking good - again
THE latest share ownership survey from the Australian Securities Exchange (ASX) shows that share ownership has steadily declined over recent years.
That's a pity because quality shares have a lot going for them - long term.
Just under a decade ago, in 2004, around four out of ten (44%) Australians had a direct investment in shares. By late 2012 that figure had dropped to 34%.
I realise many investors were hit hard and sent reeling by stock market losses when the global downturn struck in late 2007/early 2008. However my mantra has always been that shares are a long term investment, and over time shares in well managed, competitive companies will recover from downturns and go on to rise in value. And that's exactly what's happened.
As a guide, at the end of May 2013 the S&P ASX 200, the leading sharemarket index, had notched up a 1-year total return of 25.34%. The year to date return is 11.11%.
These are impressive returns, though they are eclipsed by the long term gains on some of Australia's major blue chip companies.
Ten years ago for instance, Commonwealth Bank shares were trading below $30. Today they are worth $70. In 2003, you could pick up Rio Tinto shares for less than $15 - today they are trading at $55. It's the same story with Woolworths shares, which currently trade for about $35 - a significant climb from their 2003 value of $13.
The thing is, shares don't just deliver capital growth. As a shareholder you are also entitled to regular dividends - your slice of the company's profit, and a very tax-friendly source of income.
In the case of 'fully franked' dividends, shareholders get credit for the 30% company tax paid on the profits the dividends were sourced from. If your effective tax rate is 30% there is no need to pay further tax on dividends. If your tax rate is below 30% you'll actually get a tax credit for fully franked dividends, and this can lower the tax payable on your other assessable income. If your franking credits are greater than your tax bill you're entitled to a tax refund of the excess credits.
The bottom line is that shares can produce decent returns over time despite occasional market reversals and even free falls. That makes them a worthwhile addition to any portfolio.
If you're unsure about which shares to invest in, a managed share fund offers a simple way to spread your money indirectly across a wide number of shares. Many of our large financial institutions offer a variety of managed share funds and you can get started with as little as $1,000.
Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.