Although the recent performance of the market may put you off, with interest rates at all-time low your cash in the bank may be earning you next to nothing. With any investment there is always a level of risk, so what do you need to consider and how do you get started?
Navigating the share market can be overwhelming and confusing, but you don’t have to do it alone and we recommend you don’t! Working with a financial planner not only takes the stress out of it but allows you to make informed, strategic decisions to work towards your goals.
Understand how a financial adviser can support you with your need for financial security. Get in touch.
What are shares exactly and why should you invest in them?
When you buy shares, you are essentially buying a part of that company making you a shareholder. People invest in shares in the hope that their value will increase over a period of time.
You may choose to invest an initial lump sum amount, or you can make regular contributions over time. When you invest in shares, you own the value of the investment and may also be paid dividends (returns). With these dividends you can choose to either reinvest the amount, letting it compound and grow further, or have it deposited directly into your account. The longer you have your shares invested for, the greater the potential gain through market performance and compounding interest.
Read our article on Should you live for today or save for the future?
What are the different kinds of shares?
There are several different ways you can buy shares depending on how you wish to invest.
Managed Funds: As the name would suggest your money is pooled and managed by a professional fund manager or a group of investors. Usually, you need a higher initial investment amount for this option and there are some fees attached to cover the costs of the investor. This is a great option for those who simply want to invest but don’t have the time or knowledge to invest themselves and have a larger lump sum for the initial investment.
Exchange-Traded Funds (ETF): Are a basket of different shares that look to mirror an index, such as the ASX200. ETF’s can also help diversify your portfolio as you are buying into a range of shares at once. ETF’s are a simple way to start your investment journey and require a lower initial deposit to buy in compared to managed funds.
Direct Shares: Buying shares from one particular company (such as BHP or the Commonwealth Bank) as they are made available. This option takes far more research as you are buying into the performance of one company.
Things to consider before buying shares
Before buying shares there a few points you need to consider to determine if shares are the right investment choice for you and what kind of shares you should buy.
- What are your goals? If your goal is to make a quick profit, shares probably aren’t the investment choice for you. Shares should be considered as a long-term investment so you can ride out any market volatility. Investing in shares is ideal for those who want to build wealth over a long period of time.
- What is your time frame? How long do you want to be invested? This will help in identifying what kind of shares you should buy.
- What is your risk profile? You also need to consider your risk profile and figure out how comfortable you are with potential loss or variations in markets. Ideally, you should work out your risk profile first and then decide how you want to invest.
- What is your method: Would you prefer a lump sum “set and forget” style investment or budgeting and determining if you have a surplus that you can continue to contribute as regular deposits into your investment?
- Structure: How do you want to buy and manage your shares? You might choose an online brokerage account or an investment account looked after by your Financial Adviser.
- Your current financial position: Do you currently have debts, is this the best strategy based on where you are now? How much do you have in savings and what percentage is a smart amount to invest?
Read our article on 9 tips to be a successful investor
Your risk profile explained:
Your risk profile determines how comfortable you are with the risk vs reward associated with investing. Any investment plan should be based on a sound philosophy that considers both risk and reward. We consider there to be 3 main categories of risk profiles:
Conservative: You want to minimise the chance of any loss to your investment, you don’t cope well with watching market values rise and fall significantly and you are happier with lower returns for higher security.
Balanced: You want to see higher returns as much as you want to protect your investment from a loss. You have a balanced philosophy where you understand long term gain and the possibility you could lose on investments throughout the year.
Aggressive. You want your investment to be performing at the highest possible return and you are fully aware you are more exposed to lose. Aggressive investors may experience a couple of years of loss for an overall higher gain in the future.
Your tolerance to risk is dependent upon several factors, with age being a key factor. For example, if you’re young and have many years ahead of you (a long investment horizon), you might be more willing to take a risk now. If you’re older and closer to retirement, you may be more conservative because your investment horizon is shorter and your shares won’t have as long to recover.
In many situations, you may not know exactly what kind of investor you are until you experience investing for the first time yourself. You may consider yourself to be aggressive and comfortable with the loss only to experience fear and anxiety when you see your investment drop in value. We dive deeper into tolerance of risk here.
You may ask yourself questions like
- How would I feel if I had a couple of years of negative returns?
- Am I happier to accept a lower return for more security?
- How do I feel about any loss?
- Do I prefer security or higher returns?
You can read more of this in our article how risky is risk and how to find an investment you’re comfortable with.
For a first-time investor, the process of buying shares may seem daunting, seeking the assistance of a professional like a financial adviser to get you started will ensure you’re making the most informed decisions possible. Your planner will help you to ensure your investment strategy, portfolio and risk tolerance are aligned with your personal goals and dreams. They will talk you through each step along the way, so you know exactly where you are investing and what is involved. And as your goals and plans change, so too can your investment strategy; it’s important to re-evaluate your situation, goals and dreams with your planner regularly and ensure your plan is aligned.
Things to keep in mind:
- There is always risk involved in investing
- When investing in shares, markets always move; they go up and they go down, sometimes quite significantly and suddenly, but over time they tend to grow in value
- No one knows the best time to buy or sell, time in the market is more important than timing the market
- Keep a diverse portfolio to protect yourself against in a loss in one particular area during times of volatility.
- Having a mix of asset classes is another great way to minimise the impact of a market downturn
- If you decide to invest without the help of a professional keep your initial investment amount low. This means if you lose money, you won’t lose too much, and you have the opportunity to learn more about how you feel about risk.
- If something sounds too good to be true it generally is.
Read our article on 5 investing psychology traps to avoid.
Working with a professional financial planner takes the stress out of investing by helping you to learn what works best for you, so that you can make educated, informed decisions. If you would like to speak with a financial planner about investing, please get in touch.
What you need to know
This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.