Newspapers and magazines are often filled with predictions, attention-grabbing headlines and content that incite fear amongst investors about where they’ve put their money.
Whilst there are no guarantees when you’re in the business of investing, there are simple, basic principles which all investors need to know to maximise their chances of success. Our seven basic investing principles will help you become a better investor for the long-run.
1. Define What Risk Means to You
Risk and return are related, so understanding the balance is essential in making good investment choices. Investment risk is not something that needs to be feared, rather, it can be a useful indicator of the potential gain or loss associated with an investment.
People often think of investing in shares (owning small parts of a business) as risky. One of the most effective ways to reduce price risk is to invest with a long time horizon. Over long enough time frames (say 7 years+), the returns company owners (shareholders) receive are generally higher than the returns available in a bank/cash account. So providing you don’t invest in shares with a view to selling next week, you can mitigate price risk.
Another risk to consider is investment risk, where the person who manages your investments might make poor decisions on your behalf. So here it’s important to choose wisely and ensure you do research before investing.
2. Seek Advice
There are people who do this for a living so seek their expertise and efficiency.
What you should get from a financial adviser:
- A holistic approach: they help you understand your existing financial position, clarify what your goals are and devise a strategy to help you achieve them. Most importantly, they build a financial plan about you; your age, plans, investment experience, risk tolerance and lifestyle.
- Asset allocation: the art and science of allocating your investment between shares, property, bonds, cash and other asset classes. Your adviser can help you devise a structure that suits you and your needs. They will also consult you and help make the best choices in times when markets are falling or rising.
- Investment selection: ensure your adviser has the latest research that allows them to compare investments against each other so they can choose the best investments for you based on how they fit into your portfolio.
- Financial competency for you: they are able to help you learn more about investing and be at your side as you make crucial life and investment decisions.
3. Seek value
It’s not always the billion dollar companies that will give the greatest return. It can often be the case that smaller companies or companies who seem to be floundering may be the right type to invest in as there is plenty of room for growth.
Sometimes it’s hard to find hidden gems yourself which is why we take an academic approach to investing in small and undervalued companies.
4. Diversify your investments
I’ve said before and I’ll say it again; don’t put all your eggs in one basket. Diversify your investments across:
- Asset class: e.g. shares, property, fixed interest and cash. Different asset classes perform better at different times so investing across a range will further diversify your portfolio
- Individual shares, bonds or properties
- Countries: Australia is a relatively small part of the global economic market. By investing overseas you gain exposure to industries and companies we don’t have here (e.g. IT, manufacturing).
5. Avoid chasing returns
It’s very easy to just choose the investment that had the best return the previous year and the best investment manager who performed the best. However, keep in mind that the history shows it is highly unlikely for the same investment to be at the top of the rankings more than once.
A better approach is to stick to your long-term investment plans and don’t be tempted by ‘hot’ investments that don’t usually stay hot. Seek advice, develop a strategy which suits your circumstances and then give it time to work.
6. Don’t panic
Keep calm and keep investing. This is important as in the long term, crises are usually straightened out. History has shown us that the share market can tend to plunge and then bounce back to its previous levels. Take for example the September 11 terrorist attacks. In the five days following the re-opening, the S&P 500 index fell 11.6%. By October 15th the indices were back near their September 10 levels. Investors who panicked simply crystallised losses instead of protecting their capital.
An effective way to cope with crisis and have your emotions in check is to have a financial plan; a written document which will remind you of your objectives, why you’re investing and how long your investment will be.
7. Don’t let Tax Dominate Investment Decisions
There are always tax implications when it comes to investing, but investing purely for a tax benefit can be a big mistake. Many of the much-loved ‘tax-effective’ investment schemes of the 1990’s have resulted in up front tax deductions but no return of capital (think of tree plantations or abalone farms). Getting a tax deduction can be good, but getting your money back from an investment is even better.
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If you would like to speak to us about your investment, please feel free to give us a call on 02 9913 9995. We are located in Narrabeen on the Northern Beaches of Sydney.
Disclaimer: This publication has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions.
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