Investing is when you buy something or put your money somewhere with the expectation that the total value of your money will increase.
Common investment types include:
- Property (buildings, land, factories)
- Cash (savings accounts, term deposits)
- Fixed income (bonds, debentures)
- Equities (shares)
Before you start to look at what you will invest in, you need to understand some basics about how the market that those investments operate in work.
Some investments are riskier than others. This means that some will produce higher returns than others, but a higher return will also come with a higher level of risk.
To understand what investments are best suited for you, its important to consider some basic investment principles:
Understand your Goals as well as your attitude towards risk. To chase the high returns, you also need to accept the high risk of possible losses. Understanding the principle of risk-return tradeoff will allow you to also understand what investments are best suited for you.
Time in the market vs Market timing
No one has a crystal ball to predict the future. Investment markets are always changing and the movements in the market are generally based on investor sentiment. An emotion that you cannot always get right with predictions. By staying in the market for the longer term, it allows you to ride the highs as well as the lows in the market allowing you the opportunity to achieve positive returns.
Diversification is all about spreading your risk. Youve heard the term dont put all your eggs in one basket. Having a variety of investment types in your portfolio allows you to spread the risk so on average you can minimise the risk and increase the potential of your investment returns.
Dollar cost averaging is another technique to reduce the risk of your investment by making smaller investments regularly over time rather than investing in one go. Buy more when the price is low and buy less when the price is high. Whilst it does not guarantee any loss, it minimises the exposure to risk buy drip feeding your investment in to the market. Explore the Savings Plan Calculator to understand the impact of saving over time.
Contact us today for a complimentary and without obligation initial consultation to discuss how we can help with understanding more about the basics principals of investing.