You’ve decided you would like to make your money start working harder for you, and you’re curious about investing. So what are the basics?
AIA Financial Wellbeing financial planner Christina Pascal has three rules of investing:
- Start small: you can start with as little as $1000, and see how it goes
- Be realistic: markets fluctuate, allow time to ride the ups and downs and keep a longer term view
- Diversify: spread your risk by investing in different things
Hear more from Christina about investing in our Straight Talk video series.
As you set out on your investing adventure, here are some of the common questions many beginners ask:
What is an investment?
An asset acquired with the goal of it increasing in value (capital growth or a capital gain) and/or generating income (interest, dividend or rent) over time.
The way you structure your investment portfolio will depend on your financial goals, how long you are investing for and the amount of risk you are willing to take.
What is risk?
An investment has the possibility that it may fall in value or not earn as much as you expected.
What is my risk profile?
This is your attitude to risk. You must always be at ease with your investment decisions. If you are conservative by nature, then you may feel more comfortable in low-risk investments. If you would prefer higher returns and can cope with market fluctuations, then you may be more suited to higher risk investments. Your appetite for risk is on a spectrum and can be influenced by health, age, previous financial losses or gains and your financial goals. A financial planner can ask you a series of questions to help understand your risk profile.
Your risk profile will also indicate whether you want to be actively involved with the investment or would prefer an investment where you could take a more passive role, with little involvement at all.
Beware: high returns and low risk are a myth. If it sounds too good to be true, then it probably is!
What is an investment vehicle?
Any method or structure used to invest with the aim of growing your money. This can include superannuation, managed funds, direct shares and bonds, or even art collections.
What is an asset class?
A category of investments that show similar characteristics in the market. The investments within each class should have similar risks and returns and perform similarly in particular market conditions. Examples include cash, fixed interest, property and shares. Different asset classes show different characteristics and investments between asset classes have different risk and return profiles.
What is asset allocation?
The way in which your investment or portfolio of investments is split across different asset classes.
What is diversification?
Also known as not putting all your eggs into one basket: no single investment can be all things to all people, therefore a good plan will spread the risk across a number of different types of investment.
Spreading your money across different investment types lowers your investment risk because different asset classes can perform well or poorly at different times. If the share market is volatile, but the property market is stable then having investments in both can help smooth out your investments over time. Your risk profile will determine where you feel comfortable spreading your investments.
What is ‘timing the market’?
You may have heard the advice ‘buy low and sell high’. This is a logical concept, however we would all be rich if we knew when this was. You can’t ‘time the market’, it’s time in the market that matters.
Which brings us to our final investing term.
The power of compounding interest
Simply put, you earn interest on the money you invest, and you also earn interest on the interest. The sooner you start, the longer you have time to accumulate returns and the bigger your investment grows.
The graph below shows how an initial investment of just $100 with $100 added every month, with a return of 7% per annum can grow over 5 to 35 years. Notice how greater gains can happen the longer your money is invested. However, remember that past performance isn’t necessarily indicative of future performance.
