Investing can be very complex and daunting for most people. No matter where you look there are countless advertisements looking to capture your hard earned money and plenty of financial horror stories in the media tempting you to sit tight and do nothing.
Our goal with this article is to you help clear your mind and to set you on the track to investigate your investment opportunities. It should not be read as personal investment advice. You should always seek professional advice to suit your own circumstances.
1. Create realistic investment goals
Investing without a goal is a a bit like setting off in a car with no destination in mind. Most people will find it easier to break their investment goals into time-frames. For example:
- Short term goals – One to three year time frame and include such things as a new car, home renovations and holidays
- Medium term goals – Three to seven years and could include a new home, the trip of a lifetime, and education fees
- Long term goals – Greater than seven years. Retirement planning fits into this category. Younger people may focus upon buying their first home.
There are no right or wrong time frames. Your challenge is to be realistic as to what you can achieve in each time frame.
By taking this first step of setting realistic investment goals, you’ll feel a sense of ‘taking control’ over your financial destination
2. Know where you are at right now – Your current financial position
Before you set off on your financial journey you need to know where you are starting from. As a minimum you need to know the following:
- Current investments – Make a list of your current investments and break down into cash (money in the bank), fixed interest (bonds), stocks, property and retirement/superannuation funds
- Debt – List your debts all of your debts as credit cards, personal loans and mortgages. Subtract your total debt from your current investments to get a ‘net’ wealth position
- Complete a cash-flow exercise – List all sources of your income where is it being spent. You need to be cash flow positive!
- Review your spending habits – Seek to find some immediate savings. A penny saved is a penny earned.
After completing steps 1 and 2, you can start planning how you might reach your investment goals. Spend some time with online calculators to get a sense of your investment challenges. The Savings Goals and Retirement Income calculators can be very useful for this exercise.
3. Make sure you understand investment risk
Investment risk can be very complex and even experts have tripped up by inadvertently taking on more risk than they initially calculated. Below is a very quick summary of the key investment risks:
- Fraud – Being ripped off is a very high risk. Basic rule applies – If it sounds too good to be true, it usually is
- Market risk – There are four key investment markets – cash (money in the bank), fixed interest (bonds), property and the stock market. All are very different markets and carry different levels of risk. Before investing in any market do your own research and get a good understanding of the risks
- Currency risk – All investment markets can be traded at home and abroad. However, investment values held in international markets will be affected, both up and down as a result of fluctuating currency exchange rates. As your home currency increases in value, the value of your international investments will fall and vice versa
- Diversification – While many a self made millionaire made their money through just one investment this is a risky approach to investing. Aim to consider a balance of investments that suits your end goals. You can expect a few winners and losers with your investments over a lifetime. Spreading your money around reduces the chances of you being wiped out
- Inflation risk – When I first started out in financial planning I was told that the riskiest long term investment was cash! Why can cash be so risky? Because cash pays a low rate of return and after deducting tax and inflation you often end up with a negative ‘real’ return (the net return is not keeping up with inflation) and thus unable to fund your retirement.
4. You must understand debt
Debt has brought so many people, companies and now countries undone. Debt can be a friend and also a foe. The trouble with debt is that the lender, normally a bank, always wants their money back and with interest. Secondly, the lender has greater rights over the debt contract.
To put the debt into perspective, consider this example. You borrow $100,000 and add $100,000 of your own money to purchase an investment for $200,000. This investment drops in value by 50%, down to $100,000. The bank demands its money back – all of it. Therefore, after you hand back the $100,000 you are left with zero. You have just lost 100% on your investment even though it only went down in value by 50%.
5. Get professional advice
Everyone’s circumstances are different and it is very complicated to plan and implement your investment strategies on your own. A good financial advisor will greatly assist with building a strategy to see you through the good and bad times. Additionally, professional advisers in Australia will need to accept responsibility for their investment advice and this can give you some protection if it all goes horribly wrong.
There has been plenty of negative media concerning financial advisers. There are some good ones out there, you just have to find them. Below is our guide for finding a good financial planner along with a guide for assessing a financial plan.
Best of luck with your investing and one last tip – ‘Knowledge is power’