Inspiration

3 tips to get started in investing

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It seems that everyone has an investment portfolio these days, whether it be property or shares, and they’re all getting rich.  Things might look like that from the outside, but the reality is very different.

Prior to the GFC I was working overseas.  My goal when working abroad was to work hard and save enough for a house deposit.  As my savings grew, people advised me to invest in the stock market.  I resisted based on my view that any investment in the stock market should be for a minimum of 5 years, and by this point my time horizon was shorter than that.  The other reason I didn’t want to invest in shares was that the thought of losing years of hard earned savings was too much for me, so I left my money in cash.  It turned out to be one of the best decisions I ever made, as it meant that I had money for a deposit at a time when the housing market crashed, so I got a bargain.

The morale to that story is that your motivation for starting an investment portfolio shouldn’t be fear of missing out, or peer pressure, it should be about achieving your financial goals.

The key to investing successfully is to have a long-term plan and to follow the plan.  Any good plan involves a number of steps, here we take you through some of the steps you should consider before starting your investment portfolio.

Am I ready for an investment portfolio?

Starting an investment portfolio is the pinnacle of a good financial plan.  Prior to investing, there are more mundane matters that need to be taken care of, namely:

1. Are you saving more than you are spending each month?

2. Do you pay off your credit cards in full each month?

3. Do you have 3-6 months salary saved in case of emergency?

4. Are you comfortably meeting all your debt repayments (e.g. mortgage / car loans)? Could you continue to do so if rates increased?

5. Do you have adequate life and income protection insurance in place?

6. Are your retirement savings on track?

If you can answer yes to all of the above questions, then you are ready to start investing.  If not, then try to focus on the area above that most needs your attention.

What is the goal of your investment portfolio?

Your investment portfolio should have a purpose, for example providing for your child’s education, or supplementing your income in retirement.  Identifying the purpose of your investment portfolio will help you find the best place to invest it, for example there are tax efficient vehicles available to save for education and retirement.  It will also help you find the best assets to invest in, whether they be shares, bonds, property or cash.

In identifying your purpose try to address the following questions:

  • How long will this money be invested for?
  • Is there a minimum return you need to achieve?
  • What does success look like? (e.g. sufficient funds to retire by age 60)

How much risk are you prepared to take?

When asked about return expectations, most people will say “As much as possible!” Unfortunately there is a flipside to return, risk.  A higher return necessitates higher risk.  It is important to consider how much risk you are prepared to take.

There are two aspects that impact your risk tolerance:

1. Your willingness to take on risk: This is largely driven by your personality.  Are you the kind of person to lose sleep during a market crash, or do you accept the ups and downs as part of normal market movements?

2. Your ability to take on risk: Your ability to take on risk depends on your age, how long you plan to invest for, and how much of your total net worth you are investing. Broadly speaking, the younger you are, the longer the investment horizon, and the smaller the percent of your total net worth, the higher the ability to take on risk.

Identifying your risk tolerance will help identify which assets (i.e. property, shares, bonds or cash) you should be investing in.  There are a number of online tests you can take to help determine your risk profile, such as this one.  An online test won’t give you a definitive answer, but it will help point you in the right direction.

Conclusion

Starting an investment portfolio is a process.  The more time you spend in the planning stage, the more likely you are to meet your financial goals.  Once you have confirmed:

  • That you are financially ready to invest;
  • The goal of your investment; and
  • Your risk profile

Then you ready to start building your portfolio.  The construction of a portfolio is yet another process, which we’ll discuss in more detail next time.

The information in this article is of a general nature only and may contain advice that is not based on your personal objectives, financial situation or needs. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs before acting on the advice.

About Emily Martin

Emily Martin is the founder of Balance Impact , an online investment portal specialising in ethical investing. Over her 15 year career, Emily has created, managed and monitored both ethical investment and mainstream investment portfolios, whilst working in New York, London and Sydney. She is a CFA charterholder and holds a Bachelor of Laws (First Class Honours), Bachelor of Business (First Class) and a Diploma in Financial Planning.

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