We spoke to David Robertson, Bendigo and Adelaide Bank’s Head of Economic and Market Research, about what you need to know about investing if you have literally no idea what it really involves.
To understand the basics of investing, David says you need to ask yourself a few questions,
- Why are you interested in investing and what is your goal?
- How much of a risk are you willing to take?
- What type of investment are you going to make to match your goal and risk appetite?
Why are you interested in investing?
There are lots of reasons people invest their money. Make sure you identify your reason for wanting to invest and what your goals are. It could be for a holiday a deposit for an apartment or just saving for a rainy day. Maybe you have inherited some cash and want to look after it responsibly. Either way, you will need to think about what your goal is to track the path from what money and income you have now to where you aim to build it through investing.
You may have one goal as your reason for investing. However, the Australian Securities and Investment Commission (ASIC) writes on their website Money Smart ‘smart investors think about short, medium and long-term goals.’ Having a plan and tracking your investments is crucial to achieving these goals!
An example of a goal could be something like put away a certain amount of your pay check each week into a high interest savings account until you have made it to $5000 to cover a trip around the world.
The goal could be less specific like saving for future unexpected events but it is still important to clearly identify your investment funds as opposed to your money that is needed for day-to-day living and expenses. Having a budget for those expenses helps you work out how much you can set aside for investing.
How much of a risk are you willing to take?
Working out your risk appetite is super important. Different investments fall into different categories of risk. Some investments are considered ‘safe’ as they are essentially risk free (capital guaranteed), others are riskier but generally increase in value over time, and some are considered ‘high risk’.
Safe investments will give you a return, but generally a modest rate of return. A return means you will earn interest on your investment. An example of a safe investment is your high-interest savings account that you have with your bank. These are what we call ‘capital guaranteed’ so if the amount in your bank account is under $250 000, the government guarantees it. This means you will never lose this money and while returns may be fairly low, the effect of compound interest really impacts your return over time.
Higher risk investments may give you a better return but they also may mean you can go backwards from time to time; your capital isn’t guaranteed. A higher risk investment could be buying stocks or property. Your stocks may increase in value but they also may decrease in value.
As David says ‘the higher the return, the higher the risk’. So that’s the trade-off: less risk and you will typically face lower returns - but diversifying with a mix of risks can be a compromise.
If you’re new to investing, you may want to look at investment options that are considered more ‘safe’. Remember, risks can be high or low so do your research first.
What type of investment do you want to make?
Keeping your investment as cash means the lowest risk,including using a high-interest savings account or a term deposit.
The interest rate is the percentage of your savings the bank will pay you for holding your money in that account. Interest rates are usually calculated daily and paid monthly. To find a high-interest savings account, you need to look at all the different banks and see what their interest rates are. Some may have introductory interest-rates which they offer for the first few months before reverting to a low interest rate.
Term deposits have similar interest rates to high-interest savings account but you specify how long you will keep your money in the account and you are unable to touch the money for that period of time.
- Equity (or shares)
Equity or shares mean you will be investing in the stock market, so essentially buying into a listed business. You can benefit from the shares paying dividends, so getting your share of the business’ profits; and you will also be ahead if the shares increase in value. But you do run the risk that the share price falls, which can ebb and flow as the market fluctuates, so research and advice becomes important.
Instead of buying an individual share or a portfolio of shares, another option is to buy an ‘index fund’, which can be low in fees, are diversified and ‘track the market’. The minimum investment however is around $5000, so you may need to save your cash to get started.
In the long term, property is generally considered to have a decent return, can be tax effective and is a roof over your head. Beware: This doesn’t mean you will escape the effects of a property downturn. To invest in property, you will need to save for a deposit of around 20% before applying for a mortgage. But not everyone can afford to save up a deposit (especially while renting)! If that’s you, you could instead invest in a Real Estate Investment Trust (REIT).
- Commodities or speculative investments
Another option is to invest in more speculative things like gold, wine, paintings or even trading. Some people have even resorted to buying and selling cryptocurrency, but this is off the scale in riskiness. These highly speculative investments are very risky and not generally recommended for individuals (best leave them to experienced fund managers and traders); they are a bet that could go either way. They involve buying something and waiting to sell it at a higher price. Even your super fund (which is for many of us the main long term investment we have) will tread carefully with commodities and trading.