What is investing and how does one start investing?
Investments are all things people can put money into with the hope that, one day, they’ll be worth more. That concept is the core of an investment. One invests in something in anticipation that, one day, they can receive more as one’s investment goes up in value.
However, buying in shares is where many investors start.
Over a third of Australians own investments listed on an exchange, for instance.
Investing for Beginners
Investors usually purchase assets targeting some form of gain, financial benefit, or profit.
These investment returns can be bifurcated into two classes.
Investing income: this is interest paid on things like cash and fixed-interest investments, rent received from investment properties, and stock dividends.
Capital returns/capital growth: this is achieved when the market value of an invested asset changes. For instance, one’s shares in CBA could rise in value over a period of time or one’s property could appreciate.
It is important to note, however, that a capital return remains unrealised until the asset is sold.
For instance, founders of trending stocks may be paper millionaires, but capital gains will remain unrealised until the founders sell their stake.
There are four major investment asset classes to be aware of:
- Cash: physical currency or deposits in financial products with capital security and immediate access.
- Fixed interest: debt securities including loans to governments, ADIs, companies. Fixed interest assets typically have a maturity period of three to five years.
- Property: physical ownership of an asset like a townhouse or a parcel of land.
- Equities: the investment asset class thought of most, equities refer to shares in companies. Shares in a stock signify ownership of the stock in proportion to the size of one’s investment.
Shares are the riskiest of the four asset classes and the most volatile. Partly as a result, the volatility means shares can also provide superior long-term returns.
Learning How to Invest
If one is contemplating investing for the first time and is daunted by the risks and one’s inexperience, it is often suggested one try building a virtual portfolio and tracking its performance before investing real cash.
There are many stock market simulators and share market games one can participate in to practise one’s skills.
For instance, the ASX runs the ASX Sharemarket Game where participants invest $50,000 virtual dollars.
Players can buy and sell shares in over 200 nominated companies using live prices to simulate real market conditions.
It is a good way to gain knowledge of the stock market, test one’s investment strategies, and experience it all without putting any of one’s hard-earned cash on the line.
That said, share trading simulators can never replicate emotions accompanying real losses and gains. Equanimity is harder when it is one’s own savings evaporating and not virtual currency.
Finder compiled a list of more share market games and simulators here.
It is vital to understand all investments have risks.
Some investments, like government debt securities, are less risky than others. The low risk does, however, usually correspond with lower returns.
Shares, on the other hand, can offer more returns because they entail more risk.
Therefore, before one invests, one must have a clear goal and approach.
Will one invest for one year? Three years? Five years?
Will one invest across multiple sectors and companies? Will one choose ETFs instead?
Is the target to achieve 10% annual returns? 15%? 20%?
One should never part with one’s cash without a clear idea what that cash seeks to do and how.
Pondering the above questions is important as choosing the right investment strategy will depend on one’s personal circumstances, risk appetite and goals.
Here are some common strategies to consider before deciding what’s right for one’s situation.
Strategic asset allocation sets the proportion to be invested in each asset class to meet one’s objectives. For instance, if investing for one year, one may accept low levels of risk while posting lower returns.
This may entail choosing conservative investments that compensate for their lower returns with predicable rates of return and stability.
On the other hand, if one has a long-term investment time frame of say, five years, then one may create a high-growth portfolio with riskier assets.
The longer time horizon is expected to smooth over the shorter-term volatility in the riskier assets.
Dollar-cost averaging involves investing the same amount of money in an asset at regular intervals whether the asset is up or down.
This can help average one’s purchase prices over the length of one’s investment. The practice can also instil discipline and prevent emotional buying decisions when prices are higher or lower.
The core-satellite approach involves using index tracking investments like ETFs as the stable core of one’s portfolio with lowly correlated active investments like managed funds as the orbiting satellites.
This approach can allow one to diversify across asset classes and strategies while reducing one’s investment fees.
There are other strategies like dividend reinvesting and rebalancing and plenty more besides which one should research when designing one’s own self-aware approach.
Traditional and Non-Traditional Investments
While the ‘traditional’ forms of investment are the most obvious, it’s also important to understand they’re not the only ones and that perhaps your own education is an investment equally important as the stocks you buy.
At Money Morning, we aim to help educate you about all kinds of investments, from stocks and property, to precious metals and cryptocurrencies. The more you know, and the more you read and invest in your education, the better you’ll be as an investor.
And that’s an investment that can pay off for the rest of your life.
We have a special page for our best investment picks, full of ideas and free reports to help you along the way, go check them out.