Investing is a way to build your wealth. It's never easy; there is wide choice of investment types and depending on your goals, time frame and risk tolerance depends your investment strategy. To help you understand where, when and how you can invest your money a guide is set out below.
When should I start?
It's never too early to start investing money. In fact the earlier you start investing, the more time you have in the market to increase your chances of higher returns on your investments.
Where should I invest?
Where and what you invest in is individual to you. Your investment portfolio should reflect your goals, investment timeframe and appetite for risk. You should never lose sight these three things.
Your Bernie Lewis financial adviser can assist you determine your goals, timeframe and risk tolerance and advise you of suitable investment choices for your needs.
What are my options?
Most people only know of three types of investments: cash, shares and property, when in fact there are many choices:
- Property
- Australian shares
- International shares
- Cash
- Fixed Interest
- Alternative asset classes
Within each asset class there are more choices to help you effectively manage your money and generate greater outcomes. For example, when investing in shares you can choose to directly manage your own shares or invest in a managed fund.
Some asset classes are more volatile than others. It is important that you understand the nature of each asset class you invest in because by investing in what you think is a "safe" or "smart" investment you could be missing out on opportunities to get a significantly higher return on your investments. Your Bernie Lewis financial adviser can discuss appropriate investment choices with you.
Reducing risk
You've heard the saying "don‟t put your eggs in one basket" and this is true for investing.
It is almost impossible to predict how the financial and property markets will perform. If we could we'd all be millionaires. Diversifying your investments reduces your level of risk.
You can diversify your investment strategy a few ways. You can vary the asset classes which you invest in or you can diversify your investments within an asset class.
For example, it may have been tempting to put all your money into Australian shares a few years ago, given how well this asset class performed. However this decision would be based on the popular investment misconception that past performance is a good predictor of future performance. No one can predict the future and look at the bumpy ride we've had with Australia shares in recent times.
Unless you‟re an investor with sufficient time and/or experience to keep track of movements in the markets, along with the ability to quickly change your investment strategy as appropriate, you‟re generally better off with an investment portfolio that features as number of asset "baskets".
A regular investment plan
A regular investment plan enables you to invest a set amount of money on a regular basis so that you can build your investment gradually and enjoy the benefits of dollar cost averaging.
If you're not ready to invest a lump sum, a regular investment plan could be the answer. Investing a regular amount into a share portfolio, for example, can help smooth out any short term volatility because instead of trying to pick an opportune time to invest a lump sum, by investing the same amount monthly, you‟ll be buying fewer shares when prices are high and more shares when prices drop.
Click on the graph to see a larger image
The graph above illustrates that by taking this approach to investing you are essentially averaging down the price you pay per unit of the investment. You would buy fewer shares where they are priced higher and buy more shares when they are a lower price.
