Making the jump from saving to investing is a big one, and it makes sense to want to get it right the first time.
In a nutshell, investing is all about buying an asset today with the expectation that it will create wealth in the future.
Investing takes planning and patience and prudent financial management – all the things the team here at First Financial excels in!
In fact, at First Financial, we have a tried and true philosophy about investing that has served our clients well for 15 years.
We’d love to share some of these concepts with you today and invite you to get in touch when you’re ready to take the next step towards a future of wealth and security.
Risk and return
Different types of investments provide different levels of risk and return, and your personal circumstances will determine the amount of investment risk you can tolerate.
- Investment risk is the probability of losing your initial investment or not making the income or growth you expected.
- Investment return is the increase or decrease in the value of your investment and consists of both income and capital loss or gains.
A wealth management specialist can assist you to determine the level of risk you can tolerate and project the expected return from different investment types.
The main types of investments
The main types of investments can be broken into two categories.
1. Growth investments
Growth investing is a style of investing focused on increasing the investor’s capital, and for many investors, can net impressive returns.
Growth investments include:
- Australian shares
Australian share market investing means you are buying a stake in a publicly traded Australian company.
Many shareholders earn money from ‘dividends’ paid from the company’s profit to their shareholders.
Dividends can be a tidy income stream if you have enough dividend-paying shares in your portfolio, but the payment of dividends is at the discretion of the company and is not guaranteed.
Australian share investment has the potential for capital growth if the share price rises, or capital loss if the share price falls.
- International shares
Buying international shares can offer high returns over the long term, but comes with the risk of loss of value, like Australian shares.
Unlike Australian shares, while international shares may pay some income, profit tends to be reinvested rather than paid out as dividends.
Lots of beginner investors find themselves attracted to real estate investment and there’s no question it can be a solid way to make capital gains over the medium to long term.
One major plus of property investment is the ability to collect regular returns by way of rental income.
However, property investment does carry risk, and many investors find they paid too much for a property they later cannot sell for the same price or greater.
And don’t forget, real estate investment also comes with ongoing maintenance and monitoring of rental contracts, with costs involved.
By way of direct shares or managed funds, infrastructure investments usually pay a reliable income of dividends or distributions, with the potential for both capital growth and loss.
2. Defensive investments
For many investors, a diversified portfolio is an ultimate goal, and this may include a mix of both growth and defensive investment options.
Defensive investments are lower-risk investment options that may appeal to risk-averse investors with a view to protecting and preserving their wealth, first and foremost.
Cash investments are things like everyday bank savings accounts.
While they carry lower potential returns, they are also very low risk.
But while you may receive regular interest on your cash savings, there is no option for capital growth.
Ask your financial adviser about how inflation impacts cash investments.
- Fixed interest
The most common types of fixed interest investments are bonds and term deposits.
Bonds are when companies borrow money from investors and pay them interest on the borrowings.
Term deposits require you to lock away your money for a specific period and when the time has lapsed, or the deposit has ‘matured’, you’ll get a guaranteed rate of interest for the term.
While predictable, fixed interest investments are not available as readily if you require the money quickly and the capital value of bonds can fluctuate.
- Enhanced yield
Investments in corporate debt or corporate bonds are known as enhanced yield investments.
They usually provide regular income payments at a rate higher than term deposits with capital return at maturity and reasonably low risk.
Pathway to wealth
So, what’s the best way to start investing?
Unfortunately, there is no ‘one size fits all’ approach to investing, nor is there a crystal ball to determine how your investments will fare in five, ten or twenty years.
When entering the world of investing it is important to do so with a clear plan of your investment goals and a step-by-step guide on how to achieve these goals.
The biggest pitfall of a DIY investing strategy is impulsivity, or diving into a new investment strategy without weighing up if it’s really the right option for your personal situation.
When it comes to planning to invest it pays to consult those in the know and ensure you have planned your path out of investment just as well as you’ve planned your path into it – hopefully with a healthy payoff in tow!
The team at First Financial can make sure you don’t fall victim to common investment mistakes by assisting you to enter the world of investing with a personalised plan to ensure you are a smart investor from the get-go.
Contact us to kickstart your investing journey today.