Beginner’s Guide to Investing
Investing can be daunting, particularly if it’s your first time dipping your toes into the waters. But the only way to gain confidence – and the benefits of investing over many years – is to get started. We take a look at some of the basics for beginners.
Investing can be a great way to grow your wealth. Rather than just saving money, you are putting your money to work, growing it through the magic of compound interest; that is, the interest you are paid on the initial investment and the investment’s accumulated interest. Investing can help you earn extra income and create greater long-term financial security for you and your family.
So, how do you get started?
Review your finances
Before you consider investing, it’s a good idea to take stock. Do you have a rainy-day emergency fund saved? If not, you may want to work on creating this first. It’d be wise to pay down that debt first with any spare cash you have. The next step is to create a current budget, if you don’t have one already, so you can work out exactly how much you can afford to put toward investing each month. Whether it’s $20 or $2,000 there are places you can make a start.
Get clear on your goals
Pull out a pad and pen and write down your financial goals. Then, divide these into short, medium and long-term. This can help guide you toward the type of investment strategy that’s right for you. Some investment strategies are long-term, so you don’t want to need access to that money anytime soon. Others, such as term deposit accounts, involve locking your money away for a set period – typically one to five years – in exchange for a higher interest rate than you would achieve in a regular saving account. This approach may be better suited to short to medium term goals.
Know your risk tolerance
The type of investment or investments you choose should also be guided by your ‘risk tolerance’ – that is, how comfortable are you with fluctuating returns?
As a general rule of thumb, the higher the expected return on an investment, the higher the risk of the investment. The lower the expected return, the lower the risk. Lower risk means the returns are more stable and there is less chance you could lose money. For example, a term deposit account or government bond is low risk – it pays you interest, but the value of the investment won’t change much in the short term. On the other hand, shares are typically higher risk, as the price moves up and down more in a short period of time (also known as volatility).
Research your investment options
There are many investment options to choose from these days, ranging from your superannuation to the share market. Other options include peer-to-peer lending (managed funds operated by an online platform) and micro-investing (apps that let you invest a few dollars at a time if you have limited funds with which to get started).
All investment options have their own risks, fee structure, and pros and cons. So, before you take the plunge here are some good questions to consider:
- Do I understand how this investment works? i.e. How does this investment generate a return?
- What kind of return can I reasonably expect based on past performance? (Knowing that no investment return is an absolute given unless it’s comes with a fixed interest rate, such as a term deposit account.)
- What are the risks involved? Am I comfortable with them? Can I afford the worst case scenario?
- What are the fees and charges for buying, holding and selling the investment?
- What timeframe do I need to invest to receive the expected return?
Get professional advice
Particularly if you are a beginner investor, it’s wise to get unbiased professional advice before you leap into investing. As a financial advisor I help my clients assess their financial goals and guilt a holistic strategy that suits their life circumstances and short, medium and long-term goals.
Here are a couple of good resources to get you started if you wish to dive deeper into the world of investing.
MoneySmart.gov.au by the Australian Securities and Investments Commission (ASIC) has a range of helpful topics on investing, including a comprehensive guide on how to invest, which covers a range of key topics.
ASIC also has a consumer section on its website covering Investing and Financial Advice, which can help steer you in the right direction.
Our previous article on Financial Empowerment Tools for Women contains some useful resources for growing your financial know-how.
Callus anytime on (02) 8268 2900 for an obligation-free chat.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Please consider whether the information is appropriate to your circumstance before acting on it and, where appropriate, seek professional advice.