Do you want to begin building a portfolio of investments, but not sure where to start? With a plethora of different investment opportunities available to us, it often lands in the “too-hard” basket and we never end up taking that first step!
There is also the “age old myth” that you need lots of money to begin investing, but the truth is that’s simply no longer the case! As there are micro-investing apps out there that allow you to invest as little as $5 at a time, as well as your traditional brokerage, custodial and advice-based platforms.
When we invest, we typically do so with a motivation or a vision of what we’re hoping to achieve. As let’s be honest, if you didn’t then why would you not just spend the money today and get instant gratification?
The answer is we are wanting the money to work harder for us… This takes many unique shapes & forms from person to person, but the principle is still the same. We want a dollar invested today, to buy us more in the future – whether it be freedom, time, more goods or services or simply financial security.
If you’re here reading this, it is likely that you either have started or are looking to begin your investing journey and I congratulate you for that.
Although broad & general in nature, I trust that the below tips will provide some guidance to maximise your investment success!
1. Document your objectives, plan & strategy
In plain human language, I describe this step as understanding your why. Meaning what are you looking to get out of the investment? Knowing this will help you sift through the thousands of options you have for investing your money, and will help you discount ones that are not suitable and are not likely to get you to where you want to be.
Your “why” for investing can take many unique shapes and forms. For example: you might want to buy a Property in Mooloolaba because one, you think it’s a good investment, but two, you see yourself getting use out of the property.
I also recommend documenting the above, including your plan & strategy for executing the investment over the intended timeframe (short, medium or long-term). Documenting this is a powerful tool, especially when going through uncertain or turbulent economic times – it can help keep you on course and help block out any unnecessary market noise.
A Financial Planner offers a professional advice service and will typically document any recommendations to you in a Statement or Record of Advice – this effectively is your documented financial plan containing strategies, products & long-term expected outcomes of implementing the advice.
Whilst it costs to have this service provided, effectively the principle of documentation is the same. As Financial Planners are also utilised on an ongoing basis to review the Statement or Record of Advice and recommend any changes if necessary.
2. Understand the risks & diversify
Nearly every investment carries with it, some level of risk – with the exception of Cash & Deposit accounts held with institutions covered by the Government Guaranteed Deposit Scheme.
Successful investing is a balance between risk and return, in line with the comfort levels of each investor.
All investments have a level of risk; some have more than others. Generally, investments that carry a higher risk will pay appropriate and higher returns for the higher risk taken.
This may mean volatility of investment performance and values in the short term, but may mean better/higher returns in the long term.
The relationship between risk and return is demonstrated in the following graph:
Understanding the various risks and if these apply to your intended investment, is a powerful factor in not only your initial decision to invest, but also into the future with prospective investments.
Below are some of the key risks we’re exposed to when investing, courtesy of the Australian Securities & Investments Commission’s (ASIC) MoneySmart website which provides a useful table with some of the main risks faced by investors.
- Interest rate risk – interest rates changing which reduces/effects returns on your money
- Market risk – investments falling in value due to economic changes or events that affect the specific market
- Sector risk – investments falling in value due to events or news affecting a specific sector
- Currency risk – investments falling in value due to currency movements
- Liquidity risk – you may not be able to sell you investment and get your money out
- Gearing risk – use of borrowed funds to invest, which amplifies losses (i.e. investments fall in value but you’re still required to pay remaining loan balance)
- Inflation risk – value of investments or returns from investments fail to keep pace with the rate of inflation (price of goods & services increase in the economy)
- Timing risk – the timing of your decision to invest results in lower returns or loss/reduction in capital
Reference: (ASIC, 2023, https://moneysmart.gov.au/how-to-invest/develop-an-investing-plan)
3. Save more than you spend
To put it plainly, there are logically only two ways to achieve this step.
The first option is to reduce your current level of expenditure to a level below your net/take-home income (not so easy to do).
The second way is to simply earn more income, get a side hustle, work a weekend job or anything else you possess reasonable skills in – try to monetise it!
A decent and realistic starting point is to aim to put away & save 10% of your take-home pay. By doing this, you will kick-start your investment journey and maintain momentum towards your savings & investing goals.
More importantly, if you save more than you spend, then you will not be forced to liquidate (sell) your investments to fund any expenses!!
4. Understand the tax consequences, but don’t let it drive all of your decisions
First things first, get yourself a decent Accountant!
You need someone in your corner who you can bounce ideas off and who is able to clearly articulate the benefits, risks or disadvantages of a decision, and what impact it would have on your own personal tax position.
It may be the case that your personal & financial circumstances warrant the use of a tax structure, such as a Company, Trust or Self-Managed Super Fund (SMSF) to house (fancy word for own) your current & future investments.
This is where an Accountant and a Financial Planner can be a super beneficial combination…….
It’s important to realise though, that majority of Accountant’s are not licensed to provide you with a specific recommendation on what investment to buy – instead that’s a Financial Planner’s bread & butter.
5. Get started
The biggest error you can make is not taking action, not getting started!
If you’re sitting and waiting on the sidelines for “the next big crash” or “to save up enough money”, you could potentially be leaving yourself short on long-term investment returns.
Over the long-term, history suggests that the general trend of property & share markets is upward and hence why individuals like Warren Buffet have been able to generate wealth into the billions of dollars, by taking advantage of and harnessing the power of “compound interest”.
Albert Einstein famously quoted compound interest as being “the 8th wonder of the world: those who understand it, earn it and those who don’t, will pay it.”
Jayden Allison CFP®
MFinPlan, BCom (Eco&Fin), Dip. FS (FP)
General Advice disclaimer
The general/factual information provided was done so without taking into account your personal objectives, financial situation or needs; you should consider the appropriateness of the general/factual information, in light of your own objectives, financial situation or needs, before following or relying on the general/factual information; if the general/factual information relates to the acquisition or possible acquisition of a particular financial product, then you should obtain a copy of, and consider, the Product Disclosure Statement (PDS) for that product before making any decision.