Key Post How to invest directly in shares

Brendan Burgess

Brendan Burgess

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Before you invest in shares

Buying your own home is your investment priority

If you don't own your own home, then buying a home is your priority. There are great tax advantages and there are other non-financial advantages as well.

If you are a few years away from having a deposit or if you don't want to buy now because house prices may fall, then you can consider investing in shares.

However, you are taking a risk that just as you are ready to buy, the stock market may fall sharply. So if you are within two years of buying, then keep your money on deposit.


Pay off your mortgage before you invest in shares

If you have a standard variable rate mortgage, you are paying around 4% interest on it. Paying off your mortgage is the equivalent of getting a 4% guaranteed return tax-free. This is a great return and so should take priority over buying shares.

By paying capital off your mortgage, you may qualify for a lower interest rate on the whole mortgage.

If you have a tracker mortgage, you are probably paying 1% a year, so the decision is not as clear cut. If you have a large mortgage, even if it's a tracker, you probably should pay it down to a comfortable level or keep it on deposit. But read this for a fuller discussion: Should I overpay my tracker mortgage?

If you have an SVR mortgage on an investment property, the effective rate is lower as you are getting tax relief on the interest. But it's probably still right to pay it off before investing. If it's a tracker, then do not pay it off.

Maximise your tax-efficient pension contributions before you invest in shares

The most tax-efficient long term investing is your pension fund. You should fund to a level where you will have no more than €800,000 on retirement, as the maximum tax-free lump sum is €200,000. If you are close to retirement and you don't have close to €800,000 in your fund, then fund it to the maximum level. If you are in your 30s, it's probably still worth funding it to the annual maximum up to around €500,000.

I deal with this issue in more detail in this post, where others strongly disagree with me:

What is the maximum I should contribute to a pension fund?

If you will need to access your money before retirement, e.g. to buy a house or to trade up, then you should not invest in a pension fund.
 
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The best investment strategy is to pick a diversified portfolio of shares and to hold onto them for the long term

Don't speculate and try to pick "good" shares
The stock market is fairly efficient. There are thousands of analysts around the world studying the companies and the economies in which they operate. The price today is the net result of their collective wisdom. They often get it wrong, but it's most unlikely that you will do better than them. Very few investment managers manage to beat the average returns over the long term. Don't even bother trying.

Don't sell when you hear bad news about a company you have invested in. The stock market will have already priced in the bad news.

One of the surest ways to lose money is to run up high stockbroker charges in continuously buying and selling shares.

Ignore tips from stockbrokers, newspapers and friends.

They have no track record in identifying good or bad shares. They just encourage you to trade more often and the costs dramatically reduce your returns.

Don't panic when the stock market falls
Many private investors lose out because they get interested in the stock market after it has been doing well for a few years (e.g. November 2014, the time of first writing this). Then they panic when the stock market falls.
So they tend to buy high and sell low which is the opposite of what you should be trying to do.

Ignore stock market sayings such as "cut your losses".
If you have a portfolio of shares, you will have some losers. But they may well be the best performers in the coming years.

Ignore stock market sayings such as "Take profits"
Some people feel that they should take profits after a share has done well. This makes no sense and just incurs trading costs.

However, if one share in your portfolio has done disproportionately well, and so represents a big part of your portfolio, then you might consider selling part of it to reduce your exposure to one share. The problem with this strategy though is that if the share has done very well and you sell half of them, you will have a big CGT liability.

You should not buy shares in your employer unless you are getting a discount or some significant tax advantage
It is extraordinary how many bank employees had substantial shareholdings in their own employers. Not only did they lose their jobs, they also lost a substantial part of their wealth. If you work in Bank of Ireland, don't buy shares in it or any other bank.
 
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How much do you need to invest in the stock market?

How many shares do I need to be adequately diversified?

Many commentators would argue that you need a balanced portfolio of 20 shares to minimise risk.

I would argue that there is little diversification in buying any more than 10 blue chip shares. In other words, the 11th share adds very little and is not worth doing.

The major risk in investing is a long term sustained fall in the stock markets and if that happens, it probably won't matter too much whether you have 10 shares or 100 shares, you are going to suffer big losses anyway.

There is nothing wrong with starting with only one or two shares

If you are investing your retirement savings and you have no other assets, then you need a diversified portfolio of 10 shares.

But let's say you have paid off your mortgage and have adequate pension provision and have an income of €80,000 a year. An investment of €10,000 is only a small part of your overall portfolio of assets. If it gets wiped out completely, your total wealth will fall by only 1% or 2%. So it's ok to buy just two blue chip shares of €5,000 each.

Your share portfolio will not be diversified in itself, but your overall wealth is already well diversified, especially as your pension fund probably is invested in the stockmarket.
 
So how do I pick the shares for my portfolio?

As I have already stressed, you will not be able to pick winners, or beat the market.

For your first few shares, pick some of the bigger Irish shares. You will feel more comfortable with them. You will be able to read about any developments such as dividends or rights issues. They are all well diversified geographically and only earn a small part of their profits in Ireland.

The largest companies in Ireland by market value are

CRH €13 billion
Ryanair €12 billion
Kerry €10 billion
Bank of Ireland €10 billion
Aryzta €6 billion
Smurfit Kappa €4 billion
Glanbia €3 billion
Paddy Power €3 billion


Apart from Bank of Ireland, all these companies have been consistently profitable and have been consistently paying dividends.


I am not tipping these shares. I am just listing them in order of size.

Three of these are food companies, so do not buy more than one of Aryzta, Kerry and Glanbia.


 
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Buying foreign shares

The Irish stock market is a tiny part of the overall world stock market, so people argue that it should form only a tiny part of a person's portfolio.

I am not convinced by this. Most of the companies above are very well diversified abroad. And Ireland is a good country from a corporate tax point of view. It's easy to understand and comply with your tax obligations.

My own major diversification abroad was to buy German shares at the time of the Euro crisis. My main motivation was that if Ireland left the Euro, it would be worth having at least some of my investments in "foreign Euro".

These shares are held in a nominee account. The dividend is paid to my stockbroker. There appears to be some charges before the money is actually paid to me. One of the companies, floated off a division and I was unaware of it. It would not have made the Irish media. So I ended up owning shares in a company I had not heard of.

I have a better sense of control in having share certificates in Irish companies. They write directly to me and pay dividends directly into my bank account.

So start with Irish shares and, when you are comfortable, buy shares abroad.
 
Brendan Burgess;1407517 [/B said:
The most tax-efficient long term investing is your pension fund. You should fund to a level where you will have no more than €800,000 on retirement, as the maximum tax-free lump sum is €200,000. If you are close to retirement and you don't have close to €800,000 in your fund, then fund it to the maximum level. If you are in your 30s, it's probably still worth funding it to the annual maximum up to around €500,000.

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Hi Brendan

I wonder could you elaborate on your thinking here?

I certainly understand why it generally would not make sense to contribute more than €800k to a pension fund but I'm not sure I understand why somebody should aim to have a fund of no more than €800k at retirement. Obviously the proportionate value of the maximum €200k tax free lump sum starts to diminish once the fund exceeds €800k but the fund can still grow free of income tax and CGT above this level (obviously subject to hitting the €2million SFT). Also, I think the recent reduction of the minimum required drawdowns from an ARF impact the arithmetic somewhat.

I would welcome your thoughts.
 
It could be worth adding information on how investing in non-dividend paying shares and aiming to get your entire return from capital appreciation is probably a better approach for someone who has sold an investment property at a loss and has significant capital losses to write off against future returns that would ordinarily be subject to CGT.
 
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