Investing for Beginners
Investing is an important tool for building wealth and securing financial stability for the future. Today, we have access to more content than ever, and navigating the options can be overwhelming.
Understanding the fundamental principles of investing can simplify the process and make it more approachable.
In this blog post, we will be discussing investing for beginners.
Understanding Investing
At its core, investing is using your money to buy assets to achieve a return by increasing the capital value and/or generating an income return. Think of this as making your money work for you. Using property as an example, if the value of the property increases over time this is the capital value return and the rental income the property generates is your income return. Each investment has its characteristics, some focus on providing a capital return, and some investments are more income-focused or a combination of both. Understanding these characteristics helps you align investments with your personal financial goals.
Beyond property, other common investments include shares, bonds, managed funds, ETFs and cash. Knowing the different types of investments available and how they generate returns is important when building an investment strategy.
The key concepts of investing
1) Set Clear Goals
The first step is to identify your goals and find the reason for investing. Are you saving for your first home, building wealth for retirement, replacing your work income to enable you to retire early, or investing for your children to give them a head start? Depending on your goal, it will then flow into which investment option is most appropriate for you.
Clear goals provide direction and purpose to your investment decisions and ensure that your investment strategy aligns with your life plans.
2) Time Horizon
The time horizon refers to the length of time you expect to hold your investment before needing access to the funds. The time horizon will also depend on the investment goal you identified in step 1.
Understanding your time horizon allows you to balance risk and return effectively, and to avoid needing to sell investments at the wrong time.
Longer time horizons offer the advantage of compound returns. Compounding is the process where the earnings of the investments are reinvested which over time this effect can boost the overall return. Having patience and time can be one of the greatest assets in your investment journey.
3) Growth and Defensive Assets
Growth investing focuses on increasing the investor’s capital. Examples of growth investments include:
Australian and International Shares: A share is ownership in a company listed on a stock exchange. Shares offer the potential for capital appreciation if the share price rises, or capital loss if the share price falls. Shares can pay dividends from the company’s profit to the shareholders, and this is the income return component.
Property: Property investment is purchasing a residential or commercial property for investment purposes. Similar to shares, property has the potential for capital gains or capital loss if the value falls. The income return is the rental income paid by the tenants of the property.
Defensive assets are generally lower-risk options and may focus on providing an income return. Examples of defensive assets include:
Cash: Cash investments can be everyday bank accounts.
Term Deposits: A term deposit requires you to lock away your money for a specific period, with a set interest amount paid. Once the term deposit lapses or matures, the deposit and interest are paid to the holder.
Diversification means spreading investments across various asset classes, industries, and geographies with the aim of reducing risk.
Generally, asset classes performance varies at different times, due to varying economic conditions, market trends, and global events. For example, when the stock markets are down, another asset class may be performing better. By diversifying across asset classes, sectors and regions, it helps to reduce the likelihood of an entire portfolio being negatively affected by a single event.
In addition to diversification by asset class, geographic diversification can help to protect against country-specific risks. For example, if the Australian economy is underperforming, investments in international markets may provide exposure to stronger markets.
However, diversification is not a perfect solution to investing and depending on certain events it may impact all areas of a portfolio negatively at the same time regardless of the portfolio being well diversified.
Getting Started with Investing
Investing can seem intimidating at first, but with the right knowledge and guidance, it can provide clarity and put you on the right path to success. It’s important to remember that investing requires a long-term approach.
There are no shortcuts to building wealth through investing and it takes time, patience and a well-constructed strategy.
When it comes to investing, it pays to consult experts and seek advice tailored to your specific needs and goals. With professional guidance, you can create a personalised investment plan that fits your financial situation and goals.
The team at Unified Wealth specalise in investing and can help guide you in your investing journey. Whether you are just starting or looking to review your existing strategy, we are here to help you achieve your financial goals.
After working as an advisor for a decade, Joel founded Unified Wealth.
Unified Wealth specialises in helping clients who are facing life’s big decisions.
Whether you’re contemplating your first property, growing your family or starting your investment journey we can help you focus on the simple steps to help you make your goals reality.
Our priority is making sure you have all the right information available to make the best possible decisions for you and those you love.
Our company values are:
Unity - We are most effective when we work together as a team
Trust - We are trustworthy and act in your best interests
Transparency - We are honest and communicate openly
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At Unified Wealth our team are highly experienced and provide goal-based advice and solutions for a range of advice strategies.