Recent studies show that Gen Y are becoming more and more active in relation to investing their hard earned, deposable income. However no matter what generational bracket you belong in, the key to building a great investment portfolio is to start sooner rather than later and stay invested. And here are some tips to help you along the way:
One of the keys to successful investing is recognising your investment goals and the relevant time frame for these goals. Essentially you need to ask yourself, what you want to actually do with your money?
• Do you want to save for a goal?
• Do you want to invest a certain amount?
• How long do you want to put that money aside?
In order to help you decide how long you’ll need to obtain your investment goals, consider these following examples:
Short Term (1-3 years)
• Deposit on a home
• Overseas holiday
• New car
• Starting a family
Medium Term (3-7 years)
• House renovations
Long Term (7+ years)
• Children’s education
• Deposit on a holiday house/investment property
However, not everybody has a particular investment goal in mind. You may have recently received an inheritance for example which you wish to invest as a lump sum. In this case, you’ll need to consider what you want to gain from that money. Do you want to be able to access that money in a year or two? Or would you rather a regular income or perhaps you wish to achieve capital growth over the long term?
If you perceive yourself as more of a short-term investor then you will more likely choose a more conservative investment like cash to ensure the capital is readily available in the next one to three years. On the other hand, a pensive long-term investor will be more willing to invest in growth assets such as shares or property. These investors recognise that the potential returns are higher in growth investments and if they are held over the long term the risk associated with short-term volatility is reduced.
Superannuation should also be considered as it is one of the most tax-effective ways to invest for the long-term.
Saver vs Investor
A common error many investors make is that they treat their investments as savings. This is then the reason why many people invest, but only some actually become wealthy. The difference between the two can be simply defined as:
• Saving is what you do to build up funds for something like a holiday and when you have the right amount saved, you withdraw your capital and spend it.
• Investing on the other hand is supposed to build wealth for the long term. The strategy to building wealth by investing money in growth assets is to spend the income that the investment generates but leave the capital invested. Investors don’t spend the capital so it stays there to grow, which in turn allows more income to be produced.
Some investors go by the mantra that timing is everything; others use the age old excuse to not invest simply because the time isn’t right. What these misconceptions really boil down to relates to the fact that nobody has the magical ability to predict the future. There is an illusion that the way to wealth is by jumping on the right band wagon at the right time. However, as you begin to learn more about markets and investing, it will become clear that the difficulty in picking market movements is overwhelmingly problematical. Trying to pick the magnitude and direction of market movements has cost even the most experienced investor dearly.
Whilst logic may tell you to invest in a fund that had the best performance last year, this may not always be the wisest decision. Some investors move their investments around and switch over to try and gain the best possible return but due to the volatility of the market, if you try to chase returns you may end up losing out on a lot more than you initially invested.
If you’re a newcomer thinking about investing or a sound investor looking to increase your portfolio, contact one of our financial planners on 02 9299 7044 for more information.
Important note: this information is of a general nature and has been prepared without taking account of anyone’s financial situation, objectives or needs. Before making any financial decisions based on the contents you should obtain professional advice.