Why should I invest?
There are a number of goals you may want to achieve from investing, but they’re likely to fall into one, or both, of the following categories:
- Capital growth: building and protecting your moneyCapital growth at a real rate (after fees, tax and inflation) means you want the original investment amount to grow by more than inflation, so you’ll be able to buy more in the future than you can today.
- Income generation: paying yourself an incomeYou may be at the stage in your life when you choose to live off your investments. Typically, this is when you retire and want to use the money you have invested to support your lifestyle. You’re likely to look at investments where there is a stable income or dividend stream and little risk of your original investment declining.
What are the five key investment principles
- Start early, invest regularly and reinvest returns: The earlier you start investing, the more chance your investment has to grow through the magic of compound interest – which means you’re earning interest on your interest. Einstein called it ‘The most powerful force in the universe.
Investing the same amount at regular intervals, known as dollar cost averaging, can help take the guess work out of investing as you don’t have to worry about trying to time the market. If the market is falling on the day you buy, you’ll get more units/shares on that day. It’s the opposite when the market rises. This tends to average out the investment price and smooths out market fluctuations.
It also means you don’t risk investing a large amount at the wrong time or waiting too long and missing a rebound in the market.
- Set your investment goals: You need to have a clear understanding of your investment goals, then select the right investments to achieve them.You also need a budget to help you assess your current financial situation and how much you can spare.
You can then have this amount automatically deducted from your pay to your investments. It’s the tried and tested way to stick to an investment plan.
- Diversification: Do you want to have all of your eggs in one basket, or a few?Simply put, diversification is about investing in different markets, so if one goes down, you can minimise the impact by being in a market which goes up. In economics, some markets tend to move counter to each other.
This effectively lowers the risk across your portfolio by spreading the risk. This has a smoothing effect on your investment returns – you generally won’t get the huge gains, but you shouldn’t experience the big losses.
- Timing the market versus time in the market: Timing the market is when you try to buy when the market is low and sell when it’s high. Anticipating the market’s movements can be extremely difficult.
Giving your investment time in the market: allows it to recover from short-term downturns and experience the highs of the market. History shows that while shares may experience negative returns over the short term, returns tend to be higher than cash over the longer term.
- Invest for the long term – the trade-off between risk and returnAll investments involve some degree of risk. And generally, when chasing higher returns there is an increased risk of negative returns. How comfortable you are with this will determine the types of investments you should be in. It’s called an investor profile.
What investor style are you? Our advice process enable you to identify your investment style and what sorts of investments you might consider. If you want us to help you identify your investment style contact us today.
You’ll need to strike a comfortable balance between the risk you’re prepared to take and your desired return. As a general rule, the longer the timeframe, the more risk you can afford to take.
You should also remember your strategy depends on your attitude to risk, your financial situation and goals. To identify your attitude to risk a discussion with a financial planner can help. Contact us today to truly understand you comfort level towards investing.
Once you understand the basic principles of investing, it’s time to answer some questions.
Simply by thinking about these questions, you’re on your way to developing a sound investment strategy.
- What are your goals? What do you intend to do with the money you earn from your investment(s) and what’s the timeframe you want to achieve it in? You may have a number of goals with different timeframes. Set them all out and put them in order of priority.
- What sort of investor are you? What is your approach to investing? Are you conservative, aggressive or somewhere in between? The answer will reflect a combination of your attitude to risk and your time frame.
- What investment options will suit me? Not all investment options suit everyone. You need to match your investment options to the sort of investor you are.What investor style are you? If you want us to help you identify your investment style and match your investment options contact us today.
- How do you want to manage your investments? Do you want to invest the money yourself or do you want a fund manager or broker to manage it for you?
- Do you want to diversify your investments? Do you want to invest in a variety of asset classes and markets or invest in just one? Do you realise you can do both?There are many options and ways of diversifying.
- Do you want to invest inside or outside superannuation? Generally, the investment options are similar regardless of whether you invest inside or outside of super. The main differences are in the tax implications and when you can access your money.You may find that once you set your goals and understand the types of investments which suit you, many of these questions will answer themselves. That should give you more time and better direction to find the right answers.
Setting your investment goals
To invest successfully you need to set goals and select the best investments to achieve them. To assess your current financial situation, and how much you can afford to invest, you should see a financial planner. This will help you work out how much you can afford to invest. Then you need to work out your goals.
Short versus long-term goals
You may have a mixture of short, medium and long-term goals. As investments vary in risk and return, you need to understand your goals and match your investments to them
- In the short-term you may be saving for a car or to take an overseas trip, so you need easy access to your money and the return is reasonably certain. The investments to suit these goals could be banking products, where there’s no risk of losing any of your money even though the return may be lower compared to other types of investments.
- At the other end of the spectrum, a medium to longer-term goal may be saving for your children’s education or a deposit for a house. Here, you should consider investments more likely to grow in value over the longer term. Growth assets, such as shares, carry more risk but may be more likely to help you achieve this goal.
You still have some searching to do to find the best investments within these broad categories. Knowing where to look will cut down your search time and help you find the right one.
If you want us to help you invest for your future contact us today.
Saving for that special something
Most of us have things we want but not everyone can simply go out and buy them. Whether it’s a new car, an overseas trip or a deposit for your first home, that something special is achievable if you are realistic and put in place a disciplined savings program.