Investing Demystified

Investing is something that we should all be doing.  Education about investing always comes across as complex and overwhelming and so full of jargon!  It's also usually targeted as specific types of asset investing - such as property or shares. 

There are multiple ways to invest, and there are multiple strategies - and they don't have to be complex.

Investing is the process of buying assets that increase in value over time and provide returns in the form of income payments (e.g. rental return or dividends) or capital gains (where the asset is worth more than what you paid for it).

There are a variety of things that you can invest in.  Some of the more common and well known types of investments are:

• Superannuation (yes, if you have super you are already an investor!)
• Property (commercial or residential)
• Shares in companies
• Bundles of assets (Managed Funds, Exchange Traded Funds or ETFs)
• Foreign Exchange
• Digital assets (crypto, NFTs)
• Other (gold, silver, commodities, art).

Now that we know what investing is, there are FIVE fundamentals to be aware of before diving into buying an investment:

1. Time
2. Risk
3. Asset Allocation
4. Diversification
5. Consistency (aka taking regular action).

1. Time

when it comes to investing, the earlier you start the better because you have time to ride out any crashes that might happen in your investments.

Your age also impacts how you invest.  For example, if you’re in your 20s and 30s, you have longer to work until retirement, so you can handle more risk in your investing portfolio (which is the combination of the types of investments you have.

Your stage of life is also a factor, regardless of your age.  You might have a mortgage, other debt, no debt, young kids, grown up kids. This will impact how much of your portfolio is in Defensive or Growth investments (explained more below).

What are your retirement plans?  You might want to retire at 60, or 70. Those 10 years make a big difference to how you set up your investment portfolio, so have a think about it.

2. Risk

Your Risk Profile depends on a number of factors, including:

• Your personality (how risk averse are you?)
• Your age (this impacts your Asset Allocation, which I'll explain next)
• Tolerance/reaction to up or down swings in value
• Length of time you have to invest
• Complexity of your investments
• Liquidity you need from your investments (as in how quickly and easily they can be turned into cash).

If you have a higher tolerance for risk, you might have a higher amount of Growth assets in your portfolio. The opposite applies if you have a lower risk tolerance.

3. Asset Allocation

This means how much of your wealth sits in "safer" assets like cash and term deposits (i.e. Defensive Assets), and how much sits in risker assets that are more likely to increase more in value (i.e. Growth Assets).

Here is more of an explanation of these two categories:

• Defensive Assets: Lower in risk, they are used to protect wealth, which also means their returns are also most likely going to be lower. Defensive Assets include cash (bank accounts, high interest savings accounts, term deposits) and Fixed Interest (Government Bonds, Corporate Bonds, Debentures, Capital Notes).

• Growth Assets: Higher risk and offer a higher potential return. The aim is to grow the capital (your original investment). Growth Assets include property (residential or commercial), shares (Australian and International), Managed Funds, Exchange Traded Funds (ETFs), Digital assets (crypto-currency, Non-Fungible Token or NFT) and alternatives (Gold, Silver, Private Equity, Venture Capital, Commodities, etc.).

Typically, when you are in the “accumulation phase”, which is when you’re younger and still building wealth, your Asset Allocation is generally 70% in Growth assets, and 30% in Defensive assets.

As you get older and closer to retirement, the level of risk you might be willing to take (outside of our personal Risk Profile) is a bit lower. You want to make sure there is enough money in your superannuation and other investments to support you through retirement, for the lifestyle that you want to experience during retirement. So, your Asset Allocation will likely swing more to 70% Defensive and 30% Growth Assets by the time you reach retirement.

A Financial Planner can also help with building a portfolio to suit your specific needs.

4. Diversification

This is the "don't keep all your eggs in one basket" concept.  Meaning that if all your investments are in property and the property market tanks because interest rates really skyrocket, then you have other investments that can balance out these potential losses or decreases in value.

5. Consistency

It is important to take regular action when it comes to investing.  Putting a few hundred dollars into the share market and never touching it again might work if you have 40 years and you picked an incredible stock (like buying Apple back in the 1970s).  

Here are two scenarios for you:

1. If you started with $100 and invested $100 per month, assuming a 5% annual return (pretty conservative) over 20 years, you could have $41,374.

2. You start with $100 and invest $100 per month, then increase this monthly contribution each year by 5%, with a 5% return over 20 years = $62,987.

Imagine having done nothing, and potentially missing out on nearly $63,000 (or more)?

Put this on your To Do List, and find out more.  If you want to look at starting with Micro Investing, here is my free guide to get you going.