Three Tips to Help You Get Started Investing
Investing is act of allocating money into an asset with the expectation of achieving a profit. If done right, investing can support long term wealth creation and assists many people in achieving their financial goals.
I get regular enquiries from people who want to take their first steps into investing. Below are three things I suggest everyone considers before they start their investing journey.
Tip 1: Have a clear objective
When you decide to start to invest, it is usually because investing can assist you with achieving a goal or objective. Being clear about what this objective is will assist you with making the right decisions with your investments.
A clear objective should include:
Time Horizon: How long do you intend to invest your money for
Expected Return: What long-term return do you expect or need
Strategy: How, when and why you will allocate further funds to your investment
Below is an example of a clear objective:
I will invest my surplus cashflow of $1,000 per month into a diversified investment portfolio with the expectation of achieving a 7% return per annum over the next 15 years.
Tip 2: Have Your Finances Sorted
Before investing, it is key to make sure that this is the right strategy for you. Start by understanding your assets and liabilities.
With your assets, you need to understand how much you should keep in emergency funds. Your emergency funds should cover you for any unfortunate financial event, like an unexpected expense or temporary reduction or loss of income. A great rule of thumb is to set aside enough funds to cover you for 3 months without income.
Having an emergency fund will ensure that you will be able to keep your funds invested for the long term without the need to withdraw funds from your investment account. If you are forced to withdraw / sell your investments, you may be forced to sell at unfavorable times in the market, incur unintended tax consequences or hinder your ability to achieve your long-term goals.
With your liabilities, you need to understand how much each of your debts is costing you. You will need to decide if it is financially better for you to allocate your funds to paying down debt or allocating to long term investing. There’s no point investing funds, expecting a return of 7% when you have a personal loan costing you 13%. You would have a better return on your money by paying down the debt and saving 13% interest.
Tip 3: Understand Your Investment Risk Tolerance
Each investment asset will carry a level of risk. The risk is that you may lose some or all of the money invested in that asset. Some investment assets are riskier than others. As a general rule of thumb, the higher the expected return on an investment, the higher the level of risk that investment will carry.
Lower risk assets include cash, term deposits, government bonds and corporate bonds. These assets predominately generate income, with limited capital movement.
Higher risk assets include property, Australian shares, international shares and alternative assets. These assets generate income, and their value can fluctuate a lot in a short period of time.
Diversifying between these asset classes, and individual investments, can help reduce some but not all the risk in your portfolio by not having all of your eggs in one basket.
The below chart shows historic possible range of returns investing in line with different risk tolerances. Risk bands two, three and four are more conservative and are for people who prefer steadier performance over time with potential for modest long term growth. Risk bands five, six and seven are for people who have a preference for growth and can tolerate significant up and down movement in their portfolio as a trade off for higher long term performance.
Source: Financial Express, Bloomberg
The more risk you take, the greater range of expected return you will get. When starting to invest, it is best to understand what your worst case scenario looks like and if you will be comfortable enough to weather through that in order to achieve your goals and objectives.
Hopefully these tips help you get your investment journey off to the right start. If you still feel unsure about investing for the first time, or would like some guidance on your existing investments, feel free to reach out for an initial free consultation.
This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate considering your particular objectives, financial situation and needs.
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