We trade our time for money. Most of us have jobs and we commit to spending time working in exchange for money. This is not the only way to earn more money. Yes, we can work more hours but do we all want to do this? One way we can get our money making more money for us is to invest. Our investments can even earn money when we sleep or even on the weekends. Investing can be complex, and I am not saying it isn’t, but like anything you haven’t done before, there is always a first time. You have investments in your superannuation fund right now, so you have probably been investing without even realising it.
Let’s talk about how easy it can be for you.
Types of Investments or Assets Classes
Google says you can invest in pretty much anything you want. This does not infer the less the investment is known, the more it will return or earn, just because less people know about it.
The two main types of investments, or asset classes, are:
- Growth assets: investments such as shares and property.
- Defensive assets: investments like cash and fixed interest.
These two main types live up to their names.
Shares and property are expected to grow, or increase in value, over time but will likely go up and down in value over the short term, i.e. they can be volatile.
Defensive assets still grow but at a far lesser rate, meaning they are stable. Whilst Growth assets go up and down over a short period, Defensive assets typically stay stable. Historically, in the longer term Growth assets outperform, or earn more, than Defensive assets.
Passive vs Active Managed Funds
You may also have come across the term Managed Funds whilst looking into investment options. Managed funds are run by companies that buy and sell shares on your behalf to make money. You have some of these in your Superannuation fund right now. There are two main types of funds: passively managed and actively managed funds. The easiest way to understand the difference is; actively managed funds work around the world 24-7 to make you money. Passively managed funds only work 9-5 Monday to Friday. Passively managed funds seek to match the market, and actively managed funds seek to beat the market. Passively managed funds are cheaper due to this, not to say that all actively managed funds are too ‘expensive’. Both these types of funds have their place and choosing either comes down to your preference. Just be aware of the difference and how this impacts on what you wish to achieve from your investment.
Things to Consider
Risk: How do you feel about risk? What does risk mean to you? Consider how you would feel if your investment dropped in value by 30% in the first 12 months. What action would you take? Bear in mind that all investments will go up and down over time, the trick is to think long term. Investing is a marathon, not a sprint. Be wary of any investment product claiming to make money quick. This is not investing, it is called speculating, which is considered high risk. Investors consider their time line, and this will help determine the maximum amount of risk they should accept. Risk is linked to reward but framed by investment horizon or time line. The higher the return you want, the longer the investment time frame should be and the more risk you will have to accept. Your attitude toward risk is a very personal thing but ask yourself, what is the return I want and how long am I investing for? These numbers must be determined by you.
Don’t invest your Savings: Do not invest with money that is used as a buffer, emergency or contingency. This money has a purpose and it not to make more money. You should consider always having some money set aside just in case. If you don’t have this in place, this must be put aside before you start investing because no-one can predict the future. If the you need money and it is invested, some investments may allow you to access your money relatively quickly, within a few weeks, but it will not be accessible within a few hours. The only place money can be accessed immediately is in a bank account. If your emergency can wait a few weeks and you can access your investment, you will likely be subject to an early-withdrawal penalty and possibly taxes to access the money in your investment. To avoid this, maintain your emergency account.
Initial investment: So, you have decided what investment or type of investments you like, you have your emergency account and have considered your investment time line. But how much do you invest? It does not take a lot to get started. You can buy a parcel of shares with a minimum of $500, whereas to invest in property you typically need tens of thousands of dollars. To really get started with some managed funds, you should have around $5,000 to $10,000 to invest. Also consider that once you’ve made your investment, you don’t have to stop there. You can re-invest, that is direct any income that the investment generates either back into the investment, or invest it somewhere else. Consider how this will accelerate your investment. Just like training for a marathon, you do not run a marathon on your first training day. You start small and build up, add distance, add additional funds and continue to build.
What does this mean for you? You do not need tens of thousands of dollars to start. You can begin to invest in large blue-chip companies with as little at $5,000 and you can regularly invest into these companies with as little as a $200 per month, or $50 per week, in line with your tolerance to risk.
The first step
I know you are thinking to yourself, how do I get started? One word – research. Do some reading around the investment options I have mentioned to help you figure out what you prefer. And once you feel ready, a Financial Adviser is a great person to turn to, to answer all your questions. You can see most Advisers, including those at Anne Street Partners, for at least an hour free of cost and obligation. If you are not happy with the first Adviser you speak to, go someone else, have a shop around, check reviews and work with the Adviser you feel most comfortable with, so you can build a strong relationship and build a strong investment for your future needs. You can go it alone but seeing as there is no ‘one size fits all’ solution, it is much better to speak with a professional.
You must start somewhere. It is better to start small and slowly build up your investment over time than to never start at all.