When you turn your mind to the prospect of investing in the sharemarket there are a lot of different aspects to consider. Why do you want to invest in the market? What are your investment goals? Consider whether your objectives are sound and realistic and how you are going to achieve them. This leads to thinking about mapping out your investment strategy. Then there are the practicalities of actually investing — that is, of doing it.
Saving involves setting money aside in a safe place in the hope that you will accumulate an amount sufficient to cover your future financial requirements. You can improve your chances of success by reducing your living expenses and lowering your lifestyle expectations. People with a strong savings mentality are good at this. Following this strategy means that your money may be safe as there is little chance of losing it. However, there is little you can do to protect its buying power from the debilitating effect of inflation.
Investing, on the other hand, makes your money work for you. Investors look for opportunities to put their money to use so that it may grow and create greater wealth for them. They assess alternative investment opportunities in terms of the potential risk involved, weighing them against the potential return to be made from the investment.
Strategies that take both inflation and taxation into account will improve your success as an investor, as will diversifying your risk across a range of investments.
Your own personal circumstances, responsibilities and obligations will be major factors in determining your ability to invest and what you hope to achieve. You should consider the following:
It is important to take stock of your current financial position, as it will affect your ability to raise funds for immediate investment. Also, your stockbroker or adviser will require information about your current position in order to provide you with suitable investment advice.
There are some excellent online calculators on the MoneySmart website (www.moneysmart.gov.au). MoneySmart is an initiative of the Australian Securities and Investments Commission (ASIC), which provides a wealth of general financial resources beyond investing in the sharemarket.
Take a moment to reflect on your goals:
Goal setting means thinking about what is important in the medium to long term, how much those goals will cost and how you plan to afford them.
The amount of capital you have available for immediate investment will include the value of your current investments, any surplus after-tax income and, potentially, the value of some of your general assets if you are prepared to sell or borrow against them.
Investment risk refers to both the possibility of loss and uncertainty about future conditions.
Your attitude towards risk will affect how much money you make available for investment and how you invest it. To determine your risk profile, you should consider the following questions:
Timing is another factor in determining your investment objectives. If you need funds to achieve short-term goals, you should invest in areas that are more likely to perform earlier rather than later. Alternatively, you may wish to grow your investments over the long term.
Requirements regarding timing, as well as your current lifestyle needs, will determine the returns you should seek from your investments.
When considering how timing may affect your investment objectives, ask yourself whether you require:
A popular saying is ‘don’t put all your eggs in one basket’. It can apply to many things, but it applies particularly well to investing in the sharemarket and the need for diversification.
Markets move in cycles. Some investors fall into the trap of putting all their money into one asset class — usually when it is at its peak — and then watch as another asset class takes off without them (an asset class is an investment area such as shares or property). The sharemarket is one asset class you can use to diversify your portfolio.
There is much debate as to how many stocks you should invest in to achieve prudent diversification, and this is something you need to consider and discuss with your adviser if you have one. Some advisers recommend having more than 20 stocks; others suggest that with a wary eye to correlation you can create a reasonably diversified and balanced portfolio with 10 or 12 stocks.
Once you have assessed your current financial situation and developed your future plans, you should be ready to start looking at different investment strategies and working out which strategies best suit your needs and objectives.
So if you’re ready, let’s get started!
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