Many people who are looking to bolster their savings have turned their gaze towards investing. Investing your money can be a great way to grow it, when you understand what you’re doing. With its varying levels of risk and reward, it tempts a lot of people, but you shouldn’t go in without education. This article is going to overview some tips to becoming a better investor, although we want to caution that no one gets it right every time.
Investing is a skill, though not one that any one individual can perfect. Even the experts will caution you that every one loses some days, and that prediction cannot be done perfectly. Just take a look at the Global Financial Crisis of 2008, something several major corporations are still feeling the after shock of.
This doesn’t mean that there isn’t anything you can do to encourage your changes of success. The main tip we have for any one looking to get into investing is to understand why you’re wanting to invest, and what your financial end goal is. Consider the following steps as a guide to becoming a better investor.
Step 1) Education
You need to learn what you’re getting into before jumping into it. There are plenty of resources available, plenty of which are free. Use the internet, use the newspaper, whatever tools are within your arsenal, to ensure you’re as educationally equipped as possible to jump into the world of investing.
Step 2) Purpose
Are you saving up for a house? Maybe trying to add to your retirement fund? Do you have 3 years or 10 to achieve your goals? These are elements you need to understand when determining your purpose for investments.
People have different reasons for taking up investing, and it’s important to understand your own. See the list below for a few examples of reasons people get into the investing game.
Reasons some invest
- Gain wealth
- Put specific assets to work
- Purchasing power
Take the time to write down some of your short and long term financial goals. Knowing where you’re going will help you to formulate a more specific plan of how to get there, and also assist you in avoiding unhealthy levels of risk that you may or may not be able to afford.
Step 3) Starting!
This can be the hardest part, the actual beginning. Take some time to start putting your plans into action, even if the first step is just setting up separate bank accounts or beginning to save.
Step 4) Savings
There are two ways to begin saving, by earning more or by spending less (a third option would be to do both). Change your spending habits, and make sure you’re maximizing the power of that savings by looking into a higher interest savings account.
Savings are an investment in and of themselves in terms of the fact that even if you don’t end up plunging into the world of deep investments, you will already be growing your cash at a rate faster than it would have been. So don’t underestimate the power of simply saving!
Step 5) Know the principles of risk and reward, and be aware that they apply!
No pain, no gain. Go big, or go home. We have all sorts of phrases that basically boil down to the same investment principle, that is: high risk, high reward. That being said, high risk is a higher level of risk than you have to take, you can do low risk, low reward, and put your money to work just as easily.
This is where your sense of purpose comes in. You know what you want the money for, and what you can afford to do with it, so here’s the time to hold up your goals and values against your styles of investing. If you keep these things in line, you’re not going to be disappointed.
Step 6) Advice
If you’re new to investing, it may be a wise idea to look into speaking with a financial adviser at this stage. Financial advisers can help take your background, and your goals, and unite them into a specific plan – or just answer some of the questions you no doubt still have!
Another type of expert you may want to look into sitting down with is an accountant. Financial advisers know a lot about generating income, but accountants know a lot about taxing it. To avoid any unnecessary complications with your taxes, don’t neglect the chance to get advise from an accountant about your investments.
Step 7) A target and a plan
Now that you understand what’s getting you into the investing game, determine exactly how much cash you will need to achieve that goal (or those goals). This will be your target, your measure of ultimate success in investing ventures. Once you know exactly where you’re wanting to go, or how much you’re hoping to get from this, you can get a little more specific about how you plan to get there.
Step 8) Specific planning: Direct investments, managed funds, or both?
Now it’s time to start making some specific decisions. You know you want to get into investing, you know how much you need to achieve your goals, now you need to know how you want to get there.
Specifically, do you want to be 100% in control at all times of your investments, or do you want some one else to come alongside and act as a general money manager on your behalf? Maybe you want to do a little of both. Whatever you decide, it will enable you to move forward with either direct investments or finding a money manager.
Step 9) More Education: the 5 Classes of Assets in Investing
There are five classes of defined investment assets. As an investor, it’s important that you familiarize yourself with these classes so you know how to appropriately classify your assets.
Five classes of assets
- Fixed interest: Term deposits (longer than six months), bonds, and a new range of complex high risk assessments.
- Property: This means apartments, offices, houses, garages, businesses, warehouses, and anything related to real estate. This can be a source of investment trusts or direct investing.
- Cash: Savings accounts, term deposits (with under six month terms), cash management accounts
- Australian shares: Investments in Australian companies, or in groups that include Australian share companies
- International shares: Investments in international companies, and in groups that include international-shares
What about private equity? What about infrastructure? These actually fall into subsets of the classes above. These really are the comprehensive five classes.
Step 10) Don’t put all your eggs in one basket, or class.
Diversification is the investing principle that refers to the importance of investing in more than one company, and class. There are benefits, which include a more predictable and stable return, but there are also drawbacks, ironically which include the same thing (you won’t have an unexpected huge return if you’re spread thin).
All in all, diversification is a good protection principle, but it is also a decision that comes with its own drawbacks.
Step 11) Invest in assets that make sense to you
This may sound intuitive, but there’s a lot of people who jump headfirst into a seemingly hot deal, only to find themselves hopelessly over their head in a new industry. You need to know where your money is going, and what it is going into, so as a general rule you should only invest in things you personally understand.
Step 12) Taxes
In all that you’re doing in terms of investments, don’t forget that there are tax implications. Talk to an accountant about costs, timing, and how to save as much as you can.
Step 13) Inflation
Inflation depreciates the purchasing power of your cash each time it occurs, which means you need to make enough to keep the same purchasing power. Understand inflation, and the fact that it has the potential to decrease your investments if you don’t balance them against inflation.
To know if you’re breaking even, ensure that your returns cover the inflation rate. If it is covered, you’ve turned a positive profit and have a worthy investment. If it doesn’t cover the rate of inflation, you are viewing a negative return (even if nominally it seems positive).
Step 14) Don’t forget about taxes when calculating efficacy of returns
Similarly, don’t forget to take into account taxes and fees that are associated with your investments. All of it goes into forming an effective return.
Step 15) The value of a long term plan
It can take time to become wealthy, but you can do it by forming a specific plan and holding to it over the long term.