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Investing can be an intimidating topic for many people, but it is a key part of building financial fitness.
The hardest part can be knowing where to start. So the good news is, chances are you are already an investor through your superannuation!
An investor is someone who owns assets which they expect will generate income or grow in value over time, such as property or shares
To help kickstart your financial fitness journey when it comes to investing, here are five small steps to boost your investing know-how.
Step 1. Know why you want to invest
Prices tend to rise over time, also known as inflation. Investing is a way to try to help your hard-earned savings at least keep up with inflation.
If we don’t invest and grow our money, our savings steadily dwindle in value over time in terms of the goods and services you can buy with them.
Putting your money in a savings account or term deposit can also help to preserve the purchasing power of your money. But, over time, investing in higher risk asset classes like property and shares has generally delivered higher returns.
Investing can also come with a range of potential tax benefits, including a discount on capital gains, a special form of tax credit known as ‘franking credits’ for shareholders who receive dividend income and, for property investors, the ability to deduct losses incurred in holding their asset against their other assessable income, such as salary, to reduce their tax bill. Speak to your accountant about what you may be able to claim.
While investing is a skill we’re generally not taught at school, it can be an important way to make your money work harder for you.
Step 2. Know your investment options
While shares and real estate are perhaps the most popular types of assets to invest in, there is a large spectrum of potential ‘asset classes’ you can invest in, varying from more conservative to riskier investments.
Investing in shares means you become a part owner of a company, or a bundle of companies, making you eligible for a share in any profits generated and distributed. You might also hope that the value of your share in the company grows over time.
Property investors can earn rental income from tenants and can benefit if the value of their property grows over time.
At the most conservative end of the investing spectrum are fixed income investments, like bonds. A bond is a debt security, rather than a share. Bonds are usually issued by governments and large corporations in return for a principal amount on which interest is paid to the investor for a specified time. The interest rate is fixed. The principal amount invested is repaid to the investor on maturity.
Historically, shares and property have delivered returns to owners above what they would have got from holding their money in bonds or cash, as shown in the following graph. (Source: CommSec, REIA, CoreLogic, Iress)
Other, riskier types of asset classes include commodities, precious metals, collectibles and crypto-currencies.
Step 3. Understand ways to manage your risk
As an investor, it is important to understand the relationship between risk and return, otherwise known as the ‘risk-return trade-off’. Generally speaking, making higher returns requires taking on a higher degree of risk. But higher risk also carries the possibility of capital loss – losing your money – and generally comes with higher volatility in values.
Emotions can heavily impact our investing decisions and it’s important to only take on as much risk as you can comfortably handle. Many investors lose money by buying assets when prices are high and selling out when prices fall.
Take time to understand your timeframe for investing and your personal risk appetite.
It’s also important to understand something called ‘diversification’.
Diversification means to hold a range of different assets. It can help to spread the degree of risk investors face, otherwise known as not putting all your eggs in one basket!
And that’s exactly why diversification is important. Investors who choose to invest all their money in one company’s shares, for example, face a high degree of risk of losing all their money if that one company’s fortunes fail.
You can diversify your investments and help to spread your risk by purchasing assets across different asset classes, geographies and sectors.
Step 4. Know the main ways to invest
Direct investing is when you, as an individual, purchase an asset in your own name, such as a property or a share.
It is also possible to pool your money with other investors and invest in collective investment vehicles, such as managed funds, including Exchange Traded Funds.
Managed funds can be actively managed or passively managed. Actively managed funds are managed by investment managers who actively seek to beat the broader market returns, in exchange for a fee paid by investors.
Passively managed funds charge fees too, but they are generally much lower as promised returns are simply pegged to a broader market index, such as the ASX200.
Step 5. Understand the impact of fees
It is crucial, as an investor, to consider the impact of any fees payable on your investments. Fees can be charged either as fixed dollar amounts, such as annual fees or per-transaction fees, and as a percentage of your total investment balance.
Fees should be clearly disclosed upfront. Take the time to consider the trade-off between the promise of higher returns against the certainty of higher fees eroding your investment balance.
3 steps to becoming a better investor
Investing is a journey, and it can take some time for your confidence to grow. Here are three steps you can take today to keep you going on your investing journey.
Download one investing podcast
There are many podcasts out there on investing, including The Property Couch, Equity Mates Investing, Get Rich Slow Club and CommSec Invest: The Share Market Simplified, hosted by Jamila Rizvi. Download an episode today and never stop learning!
Check out the CommSec Learn website
Whether you’re just starting your investment journey or looking to brush up on your skills, CommSec Learn will help build your investment knowledge for free.
Log in to your super fund
Take the time today to locate your account login details and make sure you know how to check your accounts online. Check your balance and make sure your money is invested in a good, low-fee fund with an asset mix appropriate for your age and risk appetite (take a deeper dive into how to give your super a health check in Lesson 5.3).
Congratulations, you’ve completed this lesson!
Next lesson: 4.6 - 5 small steps to buy your first home