How To Start Investing

How To Start Investing

Investing is approached differently by each and every individual. This can be due to a variety of things like their exposure to particular information, the sector that they are investing into or other aspects. Without wasting any time, let’s quickly dive into the basic rules of investing as a beginner throughout various life stages:

Rules for Investing – How To Build a Portfolio of Safe and Secured Investments

Don’t Put All Your Eggs In One Basket: An obvious advice, but many people fail to follow it! Many people believe that they are on the right financial track by paying off the mortgage on their family home and then shifting funds into another property for investment purposes.

Think about it! If you have put all of your financial eggs in one asset basket – property. What happens if the real estate market suffers an economic windfall? Despite common thinking that this is a safe way to invest, the outcome is very risky, that the money allocated towards investments is all within one single market.

Typical investment best practices suggest that, a two-income married couple, with no children, aged 20 to 40 years:

  • Focus: Long-term investments, medium to high risk. 
  • Emphasis: Capital gain, compound growth.

To avoid losing any capital, you need to be aware of the main pitfalls and hedge against them in order to minimize the potential risks. The simple reliable rules for investing are;

  1. Work out an optimal  mix of risk vs reward for your investment profile. Have a safe plan to work with, and consult a financial professional that can guide you in the right direction when possible.
  2. Equities have traditionally outperformed other asset groups over time. However, these markets can widely fluctuate in the short term, so any entry into the market should always be done with a long-term view with a financial planner by your side. Even the best-managed funds can fall if the stock market crashes or enters a severe downward cycle. 
  1. A reputable fund with good managers can help you feel more comfortable during the short term of ups and downs. But with proper management, your investment can potentially see a decent yield in the long-term. If you are in the short-term, low-risk category, then your investments might be better off in the safer, more stable areas with lower returns.

High-Risk Investments

High-risk investments include all speculative shares, futures and any other type of investment that is purely speculative by nature. With these types of investments we are betting on whether the price will go up or down. A high risk investment can be identified by either acknowledging the potential risks themselves or observing a higher rate of return than usual.

One-income family, young children, aged 20 to 40 years:

  • Focus: Long-term investments, low to medium risk. 
  • Emphasis: Compound growth.

A married couple with adolescent or independent children, aged 40 to 60 years: 

  • Focus: Medium-term investments, medium risk. 
  • Emphasis: Capital gain, compound growth.

Medium Risk Investments

Medium risk investments include property and non-speculative shares. Diversified funds, which invest in a range of asset groups, are also considered to have medium risk profiles. Average returns from these types of investments will range from 8% to 15% per annum.

I also like to include the broad spectrum of mutual funds, to be discussed later, in the range of medium-risk investments. Some can return up to 25% and more depending on the fund type and managers.

Single person under 40 years old:

  • Focus: Long-term investments, medium to high risk. 
  • Emphasis: capital gain, compound growth.

To invest wisely, you need to have a suitable investment plan that will ensure the appropriate amount of growth for you. Your investments will also need to be safe and easy to manage.

Mutual Funds are a selection of investments that are professionally managed by a financial institution or organization. These institutions have a wide range of specialists, researchers and advisor’s who devote their time to ensure that the fund invests in the best companies and assets.

Investing may seem daunting for a lot of people. Maybe you have tried it once and failed, or maybe you are frightened of losing your money.

After you have identified your investment type, you need to either seek a good financial advisor or devote your own time in researching investment options.

Developing an Investment Plan

Stay With The Traditional And Known: The best and most sure investments are fixed interest, property and shares. However, all asset classes will fluctuate over time.

Each time your stock reaches one of the threshold levels, you sell a third of your stock.

The first step in developing an investment plan is to identify what type of investor you are. Their stages often determine investor types in life. Here is a guide:

Single person, aged 40 to 60 years: 

  • Focus: Medium-term investments, medium risk. 
  • Emphasis: Capital gain, compound growth.

Because managed funds cover the whole spectrum of investment risk profiles, you can easily cover your preferred investment portfolio as described above, by investing in several different funds.

Putting Together Your Investment Program

The basic rule for investing in highly speculative stock is to build in ’sell-out’ thresholds, three up and three down. For example, if you buy a stock at $20.00 per share, your sell-out thresholds might be:

As well as the advantage of having experts manage your investments, managed funds also give you the ability to invest in a wide range of shares, property or fixed interest markets, either locally or internationally, for as small an outlay as $1,000. In the latter case, they also require a savings plan where you agree to deposit an additional capital with a minimum of $100.00 per month.

Have A Plan: Always ensure that you or your financial advisor draws up an appropriate investment strategy for you that incorporates your risk profile, timeframes and financial goals. As foolish as it seems, many people plunge headfirst into investing without thoroughly working through these fundamental issues.

Low-Risk Investments

Avoid borrowing for your investments: Although some financial advisors advocate ‘gearing your investments’, this can be fraught with danger. Gearing means to borrow. If borrowing for investments takes you over your 40% fixed costs margin, you will be cutting it too fine, particularly if you lose your current income level.

Basic Rules for Investing:

All investors, aged 60 and over. 

  • Focus: Short to medium-term investments, low risk. 
  • Emphasis: Income.

The following are examples of investment portfolio mixes for the various types of investors.

Superannuation returns and risk profiles vary from institution to institution; however the best and safest usually return on average 10% per annum.

Low-risk investments are predominately cash, fixed interest and superannuation. This has the lowest risk of all investments but also has the lowest return – in today’s market, approximately 3% to 6% per annum. 

Fixed interest includes cash, cash management trusts and bonds. They return approximately 5% to 10% per annum, sometimes as high as 15% if you invest in global bonds in good markets.

Build an Appropriate Timeframes: There is an old saying, “When the tea lady starts to invest in the stock market, it’s time to get out.” What this means is, when the share market is so high that everyone starts to clamber on board, it has probably reached its peak. There are two ways of successful investment timing. The first is always to pick the low-end of the market to buy and the high-end of the market to sell. This is extremely hard to do.Even The Best-Informed Experts Have Trouble: The second way is to choose good investments and stay with them over the long-term (say ten years or more) and ride the waves of the market. For safe, easy investing, choose the second method. Please do not buy into the top-end of the market and sell once it starts to fall. You will lose money this way.

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