You’ve been saving and have accumulated some money which you want to start investing, rather than just leaving it in the bank. It’s an exciting time, thinking about how you can make your hard-earned money work harder.
Before you start, there are a few things to consider before taking the plunge. Here’s a checklist of seven ideas you can use before you begin your investment journey.
Before you invest, check over your personal balance sheet – your assets and liabilities. Review any debt, particularly in a rising interest rate cycle. Although investing is a good thing, having credit card or personal debt on the other side is not. While you are at it, review your budget and include a regular savings plan within it. There are some great online tools available to allow you to do this.
At the heart of any investment decision, your goal for this money should be at the forefront of your thinking. If your goal is to be achieved in 12 months or 12 years, this will be a major factor in determining the type of investments you select and the risk you can afford to tolerate. So set your goal first. It’s also a good motivator to remind you to stick to your plan. If you don’t know why, then really, will you be motivated?
After determining your goal, the next thing is to decide the best structure to invest in. For example, if your goal is saving for retirement, then superannuation has many advantages as a savings vehicle from a tax perspective. The rules are complicated and constantly changing as to the amount you can add and the timing of superannuation investments, so having a financial adviser can save you from making a critical mistake. It is also important to understand when and how you can access these funds.
If you invest in your own name, then you are in control and you are calling all of the shots. But remember, receiving investment income and realising gains is a tax event. Understand the tax implications of investing or seek taxation advice from a tax agent.
Risk is an interesting concept because even the safest investments, like cash, held over a very long timeframe can be a risk. Today, interest rates on cash and term deposits range between 0 and 3% on average, depending on the institution.
Current annual inflation, that is the rate of price increases, is running at 6.1% annually. At these rates, the purchasing power of your money is going backwards. Risk tolerance is broadly your ability to cope and recover from financial loss. Once you understand this, then you can be in a position to make investment choices to align with your risk tolerance.
If you have done the work above then you need to find the right investments that align with these goals, your time frame and your risk tolerance. If you are doing your own research the Moneysmart website provides information on the major investment asset classes, that is fixed income, cash, shares and property, the average risk and return characteristics and average time frames to consider for each class.
Depending on the amount of funds available for investment you may invest in each class separately with direct investments, like shares for example or via a diversified fund to make the investment. Through ASX, you can access investments beyond direct shares, such as bonds, hybrids, managed funds, ETFs and more.
Even the best in the profession of financial advice cannot predict the future, and the “wall of worry” when it comes to investing is a permanent one. You can always find a reason to have concerns. If you have a larger amount to invest and plan on buying multiple securities and asset classes, you can implement your investments over a period rather than in one day which can reduce timing risk. But if you have one investment to buy, and if you are planning to hold over the long term, then just get started.
Always keep the big picture in mind if you are investing for the long term. Don’t make rash decisions based on short-term volatility. If your strategy is sound, stick with it and recognise that short-term market wobbles happen. There’s a saying that the price of entry into the sharemarket is volatility. And volatility is a both a friend and foe. You’ll love it and hate it in equal parts as an investor.
I’ve only been able to skim the surface in this article and I’ve guided you to some of the research you can do from here. You may be saying to yourself, wow, I’m going to need a lot of time to do this work. And then, how am I to choose from the multitude of investments available?
A qualified financial adviser can help you do this very time-efficiently, keep you on track, coach you through the highs and lows and become one of your sounding boards within your circle of influence, potentially for decades. Many financial advisers have qualifications across a range of financial disciplines, but usually specialise in certain areas.
Alternatively, here is a link to Moneysmart’s finding financial advice page which can help determine the type of adviser you need and check their qualifications. Or ask your trusted friends. They might be in the same stage of life as you and may have someone terrific they can recommend. If they do, you should still cross-check their qualifications and interview a couple of advisers to make sure you are comfortable sharing your financial world with them.