There are a few things you can do to help yourself understand how to invest your money, and what investments best suit your needs. Below we have pulled together some information that may help you consider how you could approach investing.
Understand your investment needs
Before you start investing, it’s important to ask yourself what your investment needs are.
Let’s start.
1. Investment budget – It’s important to understand to understand how much you can afford as an initial investment and if you choose to continue making regular investments, what does that look like in context of your other life expenses. Always be sure that you do not overextend yourself financially and be realistic.
2. Investing goal or objective – ensure you understand the vision you have for your investment in terms of your expectations. Is this investment to buy a car, grow a home deposit, or to create future wealth.
3. Investment timeline – connecting from understanding your objective this will help you determine for how long you need to hold the investment, is it for the short term (less than 18 months) or medium term (targeting 3-5 years) or the long term (over 10 years).
4. Investment risk and return – Everyone is different and depending on your personal circumstances and preferences, risk is a very important aspect to understand. Higher risk means higher potential for returns and lower risk means lower potential for returns, however depending on your budget, objective and timeline you will need to consider what level of risk versus return you are comfortable with.
Having understood the above will allow you to then select the type of investment suitable for you.
Where can you invest your money?
There are a few common investment options available to individual investors. Let’s have a look at what these are.
1. Managed funds
A managed fund is an investment where your money is pooled together with other investors. Think of it like a pot that you and others all put money into, that a professional then manages and invests into different assets on your behalf.
When you invest in a managed fund, you own units in the fund and not the underlying assets. Your units represent the value of your investment, which will change over time as the market value of the assets in the fund rises or falls.
You may earn returns in the form of capital growth (when the unit price increases) and income from distributions, which may be paid out to you or reinvested by allocating you additional units in the fund.
What to consider when choosing a managed fund
Each fund has its own objectives which determine what assets it invests in, and this in turn determines the potential returns and level of risk.
There are two categories of investment assets:
- Growth assets – investments that offer higher potential returns but also have a higher level of risk and the potential for larger fluctuations in value in the short-term (e.g. shares and property).
- Defensive assets – investments that aim to provide steady returns and are generally lower in risk (e.g. cash, gold and fixed income).
It is essential to understand your long-term investment goals (and how they compare to a fund’s objectives and suggested minimum investment timeframe) and your risk appetite before investing. You should also always read the Product Disclosure Statement for a fund before investing and ensure you understand the risks.
2. Shares
When you buy a share, you own part of a company. Your investment grows as the company’s value increases or when it pays dividends (a portion of profits distributed to shareholders). Reinvesting dividends and holding shares longer term can allow your money to grow through compounding.
Over the past 25 years, shares have delivered better than average returns compared with other investments.1 They also offer flexibility, as you can usually access your money within two business days of selling.
What to consider when investing in shares
Ensure you do your research into any company you are interested in investing in and ensure it aligns with your investment objectives and timeline. Consider are you looking to achieve capital growth (increase in share price) or are you looking to receive an income from dividend payments, or maybe a combination of both. Understand the current economic environment and potential future potentials and risks.
It’s important to note that shares come with risks such as capital loss risk (Investment value can decrease), liquidity risk (buying or selling can be difficult due to market conditions) and market and economic risks (share price can be impacted by several factors). To manage risk, consider an investment option which suits your needs and circumstance. Of course, when considering investing for the first time you should always seek your own financial advice.
3. ETFs
Exchange Traded Funds (ETFs) trade on the stock market like individual shares. They let you invest in a group of companies, assets or industries in one simple trade. This can help you spread your risk, as you’re not relying on the performance of just one company. ETFs may also offer you scalable investment by pooling your money with other investors, allowing you to have exposure to investments you may not as an individual investor.
What to consider when investing in ETFs
Ensure you are comfortable that the ETF you have selected aligns with your overall investment objectives. ETFs are generally invested with a particular theme i.e. Aussie Top 200 companies, Healthcare, Tech, Emerging markets or track an index and they do not offer you as an individual investor, choice in what companies or assets to invest into.
It’s important to understand the associated risks such as market risk (ETF values can fluctuate), liquidity risk (buying and selling can be hard during volatile periods), performance risk (returns may differ from the underlying index).
4. Property
There are two common ways individual investors can invest into property, either directly by purchasing a physical property for the purposes of generating rental income with a view of potential rise in property value or buy investing into REITs (Real Estate Investment Trust) which are generally traded on the stock exchange, like shares.
What to consider when investing in property
If investing in REITs (or A-REITs in Australia), the same considerations apply as would if you were investing in ETFs.
Investing in physical property can be a significant investment for individual investors and it is important that your rental income sufficiently covers the cost of property ownership (i.e. mortgage repayments, rates and utilities) and management (i.e. property manager fees and maintenance). In Australia, the government encourages property investment by creating a tax benefit for investment property owners through ‘negative gearing’, which allows any losses from the investment property to offset your overall taxable income – effectively reducing your payable tax. It is highly recommended to you seek the appropriate tax advice from a registered tax agent or accountant to ensure you understand your tax obligations.
Property markets are subject to market risk, house prices can fluctuate from state to state, region to region, city to city and even down to individual suburbs. Also consider liquidity risk, which is the ability to sell your investment property at short notice to convert your investment into cash.
Tips on investing
Consider the following when investing:
- Diversify your investments to ensure you can manage your risk.
- Consider your liquidity needs in the short and long term, so that you can access cash from your investments when it is needed.
- Ensure you do your research into the companies, assets or investments you wish to invest into and understand the benefits and risks equally.
Learn about investing
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