Investments

What is investing and how does one start? Investments are all things one can put money into with the hope that, one day, they’ll be worth more. That concept is the core of an investment. People invest in things in anticipation that, one day, they can receive more as one’s investment goes up in value.

The major investment asset classes are cash, fixed interest, stocks, and property.

If you think about the concept, investments can really be anything. You can invest in wine, classic cars, antiques, art; you can even invest in new things like cryptocurrencies. These are all forms of investments.

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, and companies. Fixed interest assets typically have a maturity period of 3–5 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 you’re contemplating investing for the first time and feel daunted by the risks and your inexperience, it’s often suggested to try building a virtual portfolio and tracking its performance before investing real cash.

There are many stock market simulators and share market games you can participate in to practise your 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’s a good way to gain knowledge of the stock market, test your investment strategies, and experience it all without putting any of your 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’s one’s own savings evaporating, and not virtual currency.

Investment Strategy

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 you invest, you must have a clear goal and approach.

Will you invest for one year? Three years? Five years?

Will you invest across multiple sectors and companies? Will you choose Exchange Traded Funds (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 your 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 you to diversify across asset classes and strategies while reducing your investment fees.

There are other strategies like dividend reinvesting and rebalancing, and plenty more which you should research when designing your own self-aware approach.

Traditional and Non-Traditional Investments

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 you invest, you must have a clear goal and approach.

Will you invest for one year? Three years? Five years?

Will you invest across multiple sectors and companies? Will you choose Exchange Traded Funds (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 your 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 you to diversify across asset classes and strategies while reducing your investment fees.

There are other strategies like dividend reinvesting and rebalancing, and plenty more which you should research when designing your own self-aware approach.

Read more

How to Invest

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Investment Strategy

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