Tag Archives: Investment Strategy

How much do I need to start investing?

By Robert Wright /March 10,2021/

While investing into traditional property might require a significant deposit, and a commitment to a long investment horizon, investing in shares, ETFs, managed accounts or managed funds can be accessed with a much smaller outlay along with the benefit of shorter term access to the value of your investment should the need arise.

It’s all about knowing where to start, which is quite often the hardest step. But we all have the potential to be successful investors – all it takes to get started is being armed with the right knowledge.

Taking the first steps

While some prefer to take the first few steps alone, others seek professional advice before investing. Either way, it’s important to select an investment type after you have done your research, determined your personal goals, and weighed up how you feel about risk.

Considerations such as your investment timeframe, current market conditions, expectations of future market conditions, and your tolerance to capital loss, and volatility (both positive and negative movement in returns) all need to be taken into account when choosing the right type of investment. This step alone is critical in assessing your propensity to take certain levels of risk to achieve an expected return over a given time-frame.  

As mentioned above, it doesn’t take a lot to get started. You can begin investing directly in shares, or a managed investment (offering a diversified range of investment assets including shares), with a lump sum of as little as $1000, or less when setting up a regular investment plan. You can also contribute regularly to steadily grow your investments and build a diversified portfolio – while taking advantage of the benefits of compounding returns.

Paying yourself first

If your budget isn’t quite working and you’re struggling to set aside funds to grow initial capital, there is an alternate strategy.

Called ‘pay yourself first’, instead of aiming to save whatever is left over after regular bills and expenses, consider setting aside a fixed percentage of your regular wage or salary as soon as you get paid. Better still, set up an online funds transfer with your bank timed with each pay day, so that this amount goes directly into your savings account – you may be surprised how quickly you can accumulate funds to start investing.

Doing the groundwork

Be sure to do plenty of research so you understand the market and assets in which you’ll be investing. You should also research the products you’ll use to invest in that market, such as a managed fund (you should always read the Product Disclosure Statement for the fund itself). For shares in a listed company, it might mean looking at companies’ annual reports, analyst research reports or on a stock exchange’s website.

The key point is, there’s a wealth of information you can, and should use, to help decide which investments to consider. This information should also provide insights into the risks and to some extent the tax implications of the investment you are considering.

Another critical piece of research and decision making driver when choosing the types of investments to use is looking at the costs of investing. Things such as brokerage when purchasing shares, management fees and buy/sell costs when purchasing managed funds are key when investing as when investing small amounts, fees can play a major part in impacting your initial outlay.  

Getting started

Having done your research, and formulated an investment strategy, getting started can require filling out a form, or applying digitally to purchase the investments you have selected (and paying some initial capital). From here, you might decide to set up a direct debit to steadily add to your investment portfolio.

Source: BT

What is risk appetite?

By Robert Wright /February 18,2021/

For some people, risk means excitement and opportunity. For others, it invokes feelings of fear and discomfort. We all experience a degree of risk in our everyday lives – whether it’s simply walking down the street or having investments in the share market.

Everyone has a risk profile that defines their willingness to accept risk. It’s usually shaped by age, lifestyle and goals and is likely to change over time.

Risk is about tolerating the potential for losses, the ability to withstand market movements and the inability to predict what’s ahead. In financial terms, risk is the chance that an outcome will differ from the expected outcome or return.

It includes the possibility of losing some or all of your original investment. Often you may not be aware of your risk appetite until you’re facing a potential loss, so loss aversion becomes a significant factor when making decisions related to risk.

As an investor, you should have a good understanding of your attitude towards risk. If you take on too much risk, you might panic and sell at a bad time. But if you don’t expose yourself to enough risk, you may be disappointed with your returns and potentially unable achieve your objectives.

How do I work out my risk appetite?

Generally speaking, your age, income and investment objectives all help determine your risk appetite.

Age:

Generally younger investors with a longer time horizon to invest are more willing to take greater risk with their money to earn higher potential returns. Older investors with a shorter investment timeframe may be more cautious as they’ll need their money to be more readily available and have less time to recover from a loss.

Income:

People who earn more money and have a higher disposable income can typically afford to take greater risks with their investments.

Investment objectives:

Be clear about why you’re investing and when you think you’ll need to withdraw your money, as well as how long you need the money to last. Saving for a holiday or a deposit on a home is quite different from investing for your retirement.

Risk and Return

The relationship between risk and return underpins all financial decisions. The more risk an investor is willing to take, the greater the potential return. However, investors expect to be compensated for taking on this additional risk and should realise that taking on more risk doesn’t guarantee higher returns.

Whatever your risk appetite, you should always consider both risk and return before making decisions about what to do with your money. Although shares and property are generally considered to be higher-risk investments, even more conservative investments like bonds can experience short-term losses. No investment is completely risk free.

This explains why smart investors typically have a diversified portfolio that includes several different types of investments.

Risk and Diversification

Don’t think that just because your friends invest in shares you should too. If you don’t have a lot to invest or you’ll want to access your money in a few years, shares may not be the right type of investment for you.

By understanding your risk appetite and being honest about what you want to achieve, you’re more likely to be comfortable with your investment decisions.

The simplest way to minimise investment risk is through diversification. A well-diversified portfolio will usually include different asset classes, like shares, property, bonds and cash, with exposure across different industries, markets and countries.

The idea is to reduce the correlation between the different types of investment and have a good balance of assets which move in different directions and at different times. So, if some of your assets perform poorly, others may be performing well, offsetting the poor performers.

Although diversification doesn’t guarantee you won’t suffer a loss, it’s an effective way to minimise risk and help investors realise their financial goals.

Make informed decisions

You should monitor both your risk appetite and your investment portfolio over time. Your risk appetite is likely to change as you get older, and as your income or family situation changes.

Similarly, you should review your portfolio to ensure the risk level is still suited to your overall investment objectives. Financial markets are constantly changing, which means the underlying assets you’re invested in could change too.

If you’re a confident investor, you should check that it’s still on track to generate the level of return you want and importantly, at a comfortable level of risk. If you prefer to speak with a financial adviser, they too can help you undertake regular reviews and rebalance your portfolio, as necessary.

By understanding your risk appetite, you’re in a better position to make well-informed and transparent financial decisions. It will help you identify opportunities to take on more risk where appropriate or see where you’re exposed to unnecessary risk and adjust accordingly. You’ll also avoid being caught up in the emotion of market activity, where panic can lead to a poorly timed and costly decision.

Source: BT

Nine keys to successful investing

By Robert Wright /November 18,2020/

Introduction

As an investor it’s very easy to get thrown off by the ever-present worry list surrounding investment markets that relates to economic activity, profits, interest rates, politics, and so on.

This has been magnified by a digital media where everyone is vying for attention and the best way to get this attention is via headlines of impending crisis. This all adds to uncertainty and potentially erratic investment decisions. Against this backdrop, there are some key things for investors to keep in mind in order to be successful.

Make the most of the power of compound interest

The best way to build wealth is to take advantage of the power of compound interest and have a decent exposure to growth assets. Of course, the price for higher returns is higher volatility but the impact of compounding higher returns from growth assets is huge over long periods.

Don’t get thrown off by the cycle

Investment markets constantly go through cyclical phases of good times and bad. Some are short and sharp, some can spread over many years. The trouble is that cycles can throw investors off a well-thought-out investment strategy that aims to take advantage of longer-term returns. But they also create opportunities.

Invest for the long term

Looking back, it always looks obvious as to why things happened. Looking forward no-one has a perfect crystal ball. Usually the grander the forecast the greater the need for scepticism as such calls invariably get the timing wrong or are dead wrong. 

This has been evident throughout the coronavirus pandemic with all sorts of forecasts as to what it would mean, most of which provided little help in actually getting the market low back in March let alone the rebound. For most investors it’s best to get a long-term plan that suits your level of wealth, age, tolerance of volatility, etc, and stick to it.

Diversify

Don’t put all your eggs in one basket. Having a well-diversified portfolio will provide a much smoother ride. For example, global and Australian shares provide similar returns over the very long term but in the March quarter this year global shares in Australian dollars fell less than half as much as Australian shares.

Turn down the noise

After having worked out a strategy that’s right for you, it’s important to turn down the noise on the information flow and prognosticating babble and stay focussed.

The trouble is that the digital world we live in is seeing an explosion in information and opinions about economies and investments. But much of this information and opinion is of poor quality. Don’t waste too much time on individual shares or funds as it’s your high-level asset allocation that will mainly drive the return and volatility you will get.

Buy low, sell high

The cheaper you buy an asset (or the higher its yield), the higher its prospective return will likely be and vice versa, all other things being equal of course. So as far as possible, it makes sense to buy when markets are down and sell when they are up. Unfortunately, many do the opposite; buying after a big rally and selling after a collapse which just has the effect of destroying wealth.

Beware the crowd at extremes

It often feels safe to be in a crowd and at times the investment crowd can be right. However, at extremes the crowd is invariably wrong – whether it’s at market highs like in the late 1990s tech boom or market lows like in March.

Focus on investments with sustainable cash flow

If an investment looks too good to be true it probably is. By contrast, assets that generate sustainable cash flows (profits, rents, interest) and don’t rely on excessive gearing or financial engineering are more likely to deliver.

Source: AMP Capital

Investing during a recession

By Robert Wright /August 17,2020/

In times of uncertainty, when share markets and interest rates are falling, along with declines in consumer and business confidence, investors often question if their money is safe and if it’s still going to meet their long-term investment goals.

But whether it’s a period of sustained volatility due to a global financial crisis, a medical pandemic, or a recession, the basic rules of investing hold true.

• Set long-term investment goals
• Keep investing (if you can)
• Don’t try and time the market
• Spread your risk through diversification
• Don’t panic

Keep a level head

It’s almost thirty years since Australia last experienced a recession, so for many investors where to put money during a recession isn’t something they’ve had to think about before.

We understand you’re probably concerned about your investments and wondering what to invest in if Australia does enter a recession. Volatility isn’t something investors enjoy.  The pain of losing is significantly more powerful than the pleasure of gaining, which makes us more likely to overreact during market downturns than when the market is booming.

To help your investments continue to work hard for you, we’ve outlined four simple strategies you could consider.

1. Invest for the long term

If you’re a long-term investor (with a time horizon of 10+ years), don’t let emotion get in the way of sensible decision making. Selling out of your investments and moving to cash may seem like a safe option, but you’ll potentially be crystallising your losses and missing out on any opportunities that could arise when the market rebounds.

We recommend you seek good advice at the start, so you have a plan to realise your investment dreams, leaving you to get on with enjoying your life. You’re not a professional investor, it’s not what you do for a living, so there’s no need to fear every daily movement in the share market.

2. Try to invest regularly

Volatility doesn’t necessarily result in poor investment outcomes. It can present opportunities. The principle of investing regularly, regardless of whether the market is rising or falling, allows you to buy more of an asset when prices are low and buy less when prices are high.

Known as “dollar cost averaging”, not only will this average out over the long term, resulting in a better average price for the assets, but you’ll also potentially hold more of an asset, which will be beneficial when prices rise again.

3. Be sensible and leave the decisions to the professionals

Market timing is an investment strategy used to try and ‘beat’ the share market by predicting its movements and buying and selling accordingly. It’s the exact opposite of the long term ‘buy-and-hold’ strategy, where an investor buys shares or assets and holds them for a long time, designed to ride out periods of market volatility.

According to Morningstar, investors would need to be correct 70% of the time to get any benefit from an active market timing strategy. This is almost impossible to achieve, even for market professionals. You’re more likely to miss some of the best days of the market rather than picking them correctly.

4. Allow diversification to spread your risk

Not only is it difficult to time the market correctly, but it’s also hard to predict which asset class will perform best in any given year. Last year’s best performing asset class can easily become next year’s worst, or vice versa.

Many investors choose to manage this by diversifying their investments across different asset classes (shares, bonds, cash etc.) and create a portfolio that’s based on their risk tolerance, time horizon and investment goals.

However, it’s important to understand that diversification doesn’t mean you’ll avoid market volatility completely. Even with a well-diversified portfolio, your investments could still potentially experience periods of what you’d probably deem underperformance.

Staying positive during market downturns

The most important thing you can do during market downturns is not panic.

Stay emotionally strong and ensure your investments remain aligned to your investment goals.

Source: BT