How to Start Investing with Confidence

Once you have your budget under control and some funds saved for emergencies, you may start to consider getting started in investing. But where exactly do you start, and is it really worth doing over simple savings? We’ll show you how to understand investing at its core, where to start investing and explore the argument of saving vs investing, to ensure you are really on the right track when it comes to your future prosperity.

How to Understand Investing

Risk vs Reward

When it comes to investment, “risk” refers to the chance of losing the money you have invested due to lack of performance or a drop in value in the market. While all investment assets have risk associated to them, some have more than others. Risk can come in many forms, and your financial adviser will lay them out for you, especially the types that apply to your particular scenario. They involve but are not restricted to things like interest rate fluctuations, changes in the economy or particular industry sectors, a lack of diversification in your portfolio or the timing of your investment moves.

Usually it goes like this, the higher the return expected on your investment, the higher the risk may be, and vice versa. You may choose to invest in government bonds, which do not move a whole lot in the short term. Yet, your investment may carry less risk as opposed to investing in shares, which can move up and down within a short period.

Risk Tolerance

Your risk tolerance is how you cope with the highs and lows of your investment. If your investment dropped overnight by 20%, would this cause you anxiety, enough to withdraw your money? Factors such as how old you are, your health and financial goals, as well as your ability to recover from financial loss, are all considered when working out how “risk tolerant” you may be. Every individual is vastly different to the next, so it is important that you get this one right. When you sit down with your financial adviser, you will be able to ascertain your goals, risk tolerance and strategy. It is important to align your investments to your personal risk tolerance in order to do investing right.

Saving vs Investing

Everyone should save their money; this goes without saying. Yet combining savings with investing is crucial to achieve balance when it comes to building your financial future.

Savings is crucial, especially as a safety net for your finances. It is also a great tool to kick some short-term goals and be a ‘liquid’ asset to any purchases you need to make.

Unlike saving, investing is indeed riskier and less liquid, yet it can give out higher returns in the long run and beat factors such as inflation, where savings can often disappoint. Investing is great for long term goals, as over the long term, it can far outshine normal savings in performance.

It is important to remember that investing is never guaranteed and there is always risk, which is why diversification across different asset classes and within asset classes is important, as well as investing according to your risk tolerance to ensure investment success.

Graph source: ASX.

How to Find the Right Investments

Your financial advisor will talk you through how to structure your portfolio. You will be able to work out goals for your financial future, what you want your investment time frame to be based on those goals, and how tolerant you are to risk. If most of your goals are short-term, perhaps you may choose to invest in term deposits or bonds. Yet, if your goals are long-term and you are happy to ride the investment highs and lows to get there, shares and property may be what you choose. No matter which strategy you go with, the general rule is to diversify your portfolio. This means if one investment class fails, or even something within an asset class fails, your other investments will carry the shortfall and protect you from losing out completely.

Some questions to ask when structuring your portfolio

• How much time do I need to invest to get the return I want?
• What can I hope for as a return on this investment?
• What risks are involved, and am I happy to take them?
• How long will it take to sell and get my cash back if I choose to?
• How much will it cost to buy and sell my investment?
• Is there income tax or capital gains tax on my earnings? If so, how much?

Getting started in investing does not need to be overwhelming. Investing, when done right, is crucial to create a balanced financial strategy. Ensure you see your financial planner and get the right financial advice, to create an investment strategy suited to your risk tolerance, scenario and dreams for the future. For more information get in contact with Elliot Watson Financial Planning on 02 4038 1623.

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