Investing may seem daunting for a lot of people. Maybe you have tried it once and failed, or maybe you are simply frightened of losing your money.
To avoid losing any capital, you simply need to be aware of the main pitfalls and always avoid them. The simple, reliable rules for investing are:
1. Have a plan. Always ensure that you or your financial advisor draws up an appropriate investment strategy for you that incorporates your risk profile, timeframes and financial goals. As foolish as it seems, many people plunge headfirst into investing without thoroughly working through these fundamental issues.
2. Don’t put all your eggs in one basket. Obvious advice, but many people fail to follow it. Many people think that they are on the right financial track by paying off the mortgage on their family home and then buying another property for investment purposes.
Think about it! You have put all of your financial eggs in one asset basket – property. What happens if the property market collapses? Despite common thinking that this is a safe way to invest, the outcome is very risky. You have invested all of your well-earned money into only one area.
3. Build in appropriate timeframes. There is an old saying, “When the tea lady starts to invest in the stock market, it’s time to get out.” What this means is, when the share market is so high that everyone starts to clamber on board, it has probably reached its peak.
There are two ways of successful investment timing. The first is to always pick the low-end of the market to buy and the high-end of the market to sell. This is extremely hard to do. Even the best-informed experts have trouble. The second way is to choose good investments and stay with them over the long-term (say 10 years or more) and ride the waves of the market.
For safe, easy investing, choose the second method. Do not buy into the top-end of the market and sell once it starts to fall. You will definitely lose money this way.
4. Avoid high-risk investments. These include risky business ventures, highly speculative stock, tax avoidance schemes or too-good-to-be-true propositions that promise unusually high returns.
5. Avoid borrowing for your investments. Although some financial advisors advocate ‘gearing your investments’, this can be fraught with danger. Gearing means to borrow. If borrowing for investments takes you over your 40% fixed costs margin, you will be cutting it too fine, particularly if you lose your current income level.
6. Stay with the traditional and known. The best and surest investments are fixed interest, property and shares. Although all asset classes will fluctuate over time.
Work out the optimum mix for your investment profile, have a safe plan to work with and you can’t go wrong.
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6 Rules for Investing
The first step in developing an investment plan is to identify what type of an investor you are. Investor types are often determined by their stages in life. Here is a guide:
- Single person under 40 years old. Focus: Long-term investments, medium to high risk. Emphasis: capital gain, compound growth.
- Two-income married couple, no children, aged 20 to 40 years. Focus: Long-term investments, medium to high risk. Emphasis: capital gain, compound growth.
- One-income family, young children, aged 20 to 40 years. Focus: Long-term investments, low to medium risk. Emphasis: compound growth.
- Single person, aged 40 to 60 years. Focus: Medium-term investments, medium risk. Emphasis: capital gain, compound growth.
- Married couple with adolescent or independent children, aged 40 to 60 years. Focus: Medium-term investments, medium risk. Emphasis: capital gain, compound growth.
- All investors, aged 60 and over. Focus: Short to medium-term investments, low risk. Emphasis: Income.
The following are examples of investment portfolio mixes for the various types of investors.
Low Risk Investments:
Low risk investments are predominately cash, fixed interest and superannuation. This has the lowest risk of all investments but has also the lowest return – in today’s market, approximately 3% to 6% per annum. Fixed interest includes cash, cash management trusts and bonds. They return approximately 5% to 10% per annum, sometimes as high as 15% if you invest in global bonds in good markets.
Superannuation returns and risk profiles vary from institution to institution, however the best and safest usually return on average 10% per annum.
Medium Risk Investments:
Medium risk investments include property and non-speculative shares. Diversified funds, which invest in a range of asset groups, are also considered to have medium risk profiles. Average returns from these types of investments will range from 8% to 15% per annum.
I also like to include the broad spectrum of mutual funds, to be discussed later, in the range of medium risk investments. Some can return up to 25% and more depending on the fund type and managers.
High Risk Investments:
High risk investments include all speculative shares, futures and any other type of investment that is purely speculative by nature. Because with these types of investments we are betting on whether the price will go up, or sometimes down, I often classify this as a form of gambling. Accordingly, the returns are unlimited but so is the ability to lose the total money invested.
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Investor Types and Risks
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Kim describes her thoughts, decisions and fears of her first investment purchase. Listen in as she talks about the time it took to find the property and her fears of making a bad investment.
