Investing can be as simple or as complicated as you make it
Following simple rules can make the process easier to understand
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INVESTING is growing more complex by the day as we are bombarded with new products, new strategies and ever changing market conditions. However, if people follow a few simple rules, they can make sense of the confusion and enjoy success in the investing game.
Five financial experts agreed to share their golden rules of investing. Here are 10 of their best.
Savings & Loans Credit Union senior manager financial planning Phil Butterfield says people should try to make a habit of investing or saving a portion of every dollar they make.
“Regular additions to your investment, as well as reinvestment of any dividends or interest to achieve a compounding effect, is a tremendous way to boost your investment,” he says.
ANZ financial planner Jacquie McCarthy says by investing regularly, you remove the risk of investing a lump sum right before a market slump. “The investment adage ‘time in the market is better than trying to time the market’ applies,” she says.
Financial Planning Association SA chapter chairwoman Kerrin Falconer says reinvesting dividends or interest income ensures you earn interest on your interest on your interest and so on.
“Compound interest does work,” she says. “It is often referred to as the eighth wonder of the world.”
Stay the course
This rule has been more important than ever in the past six months, with many investors tempted to sell their share portfolio after the market slumped more than 20 per cent.
Macquarie Private Wealth Adelaide head of strategic financial planning Jon Wells says when markets drop it can be tempting for some investors to lose sight of their long term goals.
“Panic selling and knee jerk reactions during a downturn will ensure any losses are realised and can have adverse consequences for your portfolio,” he says.
“Higher risk investments generally have a longer time frame associated with them in order to help with market recovery if required,” she says. Shares and property are the most common types of higher risk investments while cash and fixed interest offer lower risk and lower returns over the long term.
Keeping all your eggs in one basket can be a recipe for disaster and investors should aim to hold a range of different investment types.
“A truly diversified portfolio should be spread across different investments within each of the major asset classes, including Australian shares, international shares and property,” he says.
Diversifying within asset classes means instead of just owning mining company shares, investors reduce their risk by also investing in such areas as retail, banking, healthcare, insurance, agriculture, energy and transport.
Avoid get rich schemes
“If it is too good to be true, it probably is,” says the FPA’s Ms Falconer. “Speculative shares that will triple overnight or fixed interest investments that offer returns of more than 10 per cent a year should always have a ‘buyer beware’ notice on them,” she says. “Take advice from professionals, not taxi drivers.”
Investing is not a fire and forget activity. You need to keep up with tax and legislation changes. “A formal analysis of your taxation and financial situation on at least an annual basis will help keep you on track to meet your goals and objectives,”
Some investors compile a monthly net worth chart keeping track of all their assets and debts to ensure their wealth is steadily growing and they are not spending their money on depreciating assets, such as cars.
Get the structure right
“Superannuation provides significant tax advantages, particularly in retirement, but you can’t access your super until you retire,” he says. “Non super investments can be accessed at any time but need careful management of the tax implications to give the best net return to you.”
investors should understand how investing in shares provides franking credits that can reduce overall tax payable and they should understand the rules surrounding superannuation.
Borrow to invest
Also known as gearing, borrowing to invest magnifies potential gains and losses.
“It means your investment balance is bigger, and therefore so is your potential return in dollar terms. Your investment needs to out perform the interest costs on your loan, however, those interest costs in most cases are tax deductible,”
“Borrowing to invest should be considered as a long term strategy but it is easy to establish and can also be set up as a savings plan where you borrow small regular amounts to add to your investment.”
Look long term
People should only invest in higher risk assets, such as shares and property, if they have a timeframe of at least five years.
A fundamental starting point to investing is understanding what you want to achieve and being realistic about how you are going to achieve it.
“This involves thinking about where you are now, where you want to be, how long it is going to take to get there and what level of risk you are comfortable with,” he says. people should aim to invest in a sound manner to build and protect wealth long term.
Seek professional advice
All five financial experts say this is an important rule. “Valuable advice from a licensed financial adviser can significantly improve your investment outcomes,”
Mr Wells says it is crucial to tell your adviser about your financial goals and dreams. “An adviser who understands you, your goals and your risk profile can guide you through both the rough and smooth of investing,” he says.
Spend less than you earn
It is one of the simplest rules but one that is broken more often than others.
“If you save you will then have the funds for investing,”
“If you find it hard to save then do a budget. Often little things like taking your lunch to work can save quite a few dollars.
For example, if you save $4 a day on your lunch you will save approximately $1000 over a year.”