Starting your personal investing
You can invest your personal savings in many ways, and you may not want to put all your spare cash into superannuation. It's a large and complex subject but here's a few tips about investing your money in other financial products.
A crowded marketplace
Everywhere you look you'll see advertisements for investments and financial advisers. There's more than you could sample in a lifetime, and they all sound completely convincing.
You can invest directly in more than 1,400 companies through Australia's financial markets. If you invest in superannuation, managed funds, master trusts and wrap accounts you can choose from thousands more alternatives. Then there are traditional investments in real estate, government and company bonds, and more exotic choices ranging from agricultural schemes to options and warrants. There are tens of thousands of people to advise and deal with you on all these choices.
You can succeed
You can invest successfully, especially as an Australian, because you can find markets, products and advisers that will help you achieve your goals.
It can be worth getting initial advice even if you intend to start small. Centrelink’s Financial Information Service can give you information about investments face-to-face, though they can’t recommend particular financial products.
It may suit you better just to go out and choose a licensed financial adviser and follow their advice. If you want to do that, please read our tips on Getting advice.
On the other hand, it's not always so easy as it sounds. If you are just starting, you may find that advisers simply won't see you because you don't have enough money to make it worth their while. In any case, if you don’t know where to start, then you may not be happy just to put your faith in someone else, no matter how reputable, until you understand what they are talking about. So in the end, if you think you may need to invest, you probably have to learn some of the ropes yourself.
| TIP! | Before you invest, read more in personal finance columns and investment magazines, and in books by licensed Australian advisers or do a course run by a reputable organisation. More about learning to invest |
When do you start?
Start now, no matter how small the amount you have. The longer your investment has to grow, the better the results. Even if you can’t afford to invest a large amount, you may be able to start a small but regular investing program.
Below are two examples showing how Nat and Sam hope to invest, compared with their friend Greg who can afford to invest a lump sum now.
| Investors | What they plan | What they hope to achieve in 10 years* |
| Nat and Sam | $500 at the start and $150 each month. (Total investment $18,350) | About $25,500 |
| Greg | $10,000 at the start and nothing more | About $17,000 |
* Based on earning 6% each year after fees and taxes, and reinvesting their investment earnings.
Work out your objectives
Start by working out your objectives. It's worth spending a few moments thinking about these two simple words. They ought to represent personal aims that money may help achieve, not money itself. They are the foundation of where to start, although in themselves they are not financial at all.
'Your' objectives. First, let's highlight the 'you' in your objectives:
- What's going to be personal to you?
- What do you want to pursue in life?
- What things do you really enjoy doing and talking about?
- What brings you happiness and satisfaction?
While you will probably need financial security to enjoy these things, you may not require a fortune.
What other people want either for themselves or for you does not really matter. Chasing those things can even bring you unstuck financially. For example, financial frauds and sleazy investment seminars often try to make you:
- envy other people's lifestyles with images of people lolling in the sun, drinking coloured cocktails or draped over new cars and
- fear other people's situation with stories of struggling to live off the pension, eating poor food, or living in squalid surroundings.
Envy and fear of others is unlikely to start you on the right course for finding your own objectives.
'Objectives'
Objectives refer to the ultimate purposes or reasons for investing. While investing is obviously meant to make money, money is meant to serve a purpose.
Generally that purpose is to change your life in some way within some period of time.
What changes do you hope to achieve?
You may want to set up a more secure or comfortable retirement, pay for further education, live overseas for a year or just want to open up more choices about how you spend your life. Your needs may include other people who depend on you.
How soon do you want to achieve your objectives?
Small changes can usually be made reasonably quickly. Making large changes usually takes longer, and requires you to break them down into stages that you can achieve one at a time. Otherwise, it's hard to stick to your plan.
Trying to make big changes in a hurry increases the risk of failure and often demands all or nothing gambles. Financially, these gambles often turn into 'get rich quick schemes', that usually end up destroying people's fortunes and their lives.
Start by taking time to consider, write down and review your objectives.
What do you invest in?
That depends on:
- how long you can invest the money for, and
- how comfortable you feel about different investments.
Investments are usually divided into two main types:
Income investments like cash management trusts and government bonds give you an income from earning interest, but usually little or no capital growth – your original investment doesn’t increase in value.
Growth investments like shares or property may give you capital growth over the long term, so that, as well as earning income, your original investment may increase in value.
Investment time frames and appropriate investment choices
| How long can you spare the money? | Common investment choices |
| 6 months to 2 years | Aim to earn interest with little risk, for example in term deposits and cash management accounts |
| 2 to 5 years | Aim to earn mainly interest, possibly adding some growth assets, such as property and shares |
| 5 years or more | Aim for capital growth as well as income by including more shares and property |
How can you invest?
You can make your own investments directly, which gives you control of all the decisions. That means working out your own investment strategy, and keeping up to date with your investments and what’s happening in the market through company annual reports and the financial media.
You can also invest indirectly through managed funds. Your money is pooled with money from other investors, and a professional manager makes the decisions for all the investors. You don’t have to worry about day-to-day investment decisions, but you do pay fees for the manager’s services. Do take the time to read your fund’s annual report.
Either way, you might still seek advice from a licensed advisory business. Read our tips on getting good advice
How can you manage risk?
All investment involves some risk, but you can reduce it by:
- investing in small amounts regularly to reduce the risk of investing everything just before the market drops
- spreading your money across different kinds of investment choices (such as shares, property and cash) to reduce the risk of being in the wrong market at the wrong time
- spreading your money among shares in different companies, different properties and different industries to reduce the risk of losing heavily on a single investment. (Some managed funds can do this more easily than trying to do it yourself.)
- dividing your money between two or three fund managers to reduce the risk of picking just one that’s about to perform poorly.
More information about diversifying your investments
| TIP! | You can reduce risk by investing small amounts regularly and spreading your investments. |
How can you cut costs?
Fees, especially ongoing fees charged as a percentage of your investment, can make a big difference to what you earn. Always make sure you know what fees are charged before you make an investment. (Some investment arrangements, such as ‘master trusts’ and ‘wrap accounts’, may offer extra features and services, but make sure you will actually use them, otherwise you could pay extra fees for nothing.)
Find out more about fees for investment products.
What returns are realistic?
For a general idea, compare any investment with what’s happening in the overall market. Returns vary considerably from year to year, so look at performance over as long a period as possible. Over 5-7 years, it may be realistic to expect returns that average about 7% to 9% a year from growth assets such as property and shares. Income investments may keep pace or do very slightly better than inflation, say about 4-6% a year, depending on the risk involved.
If you are offered returns even 1-2% above current market rates, you are likely to be taking a much higher risk in investing. Anything above 15% would be very high risk indeed, possibly even a scam.
FIDO has lots more information about rates of return and risk
| Remember! | If it sounds too good to be true, it’s probably a lie. |
What if the market falls?
The market value of investments rises and falls. Falls occur regularly and may present good opportunities for bargain buying.
Markets generally recover, but they can take time. It’s important to set your goals and your time frames and stick with them, rather than worry about every change in the market. Rates of return: what history shows
Should you borrow to invest?
Once you get your budget, insurance and superannuation savings in place, you might consider borrowing to invest. Borrowing to invest increases the amount of money you have to invest. That means either increasing your gains or your losses.
It is a more risky strategy, so weigh up if you’ll feel comfortable and consider your own financial strengths and weaknesses:
- Will you be able to manage the debt even if your investments perform poorly?
- Do you have a reliable income with a safety net of cash and insurance?
- Is your savings history and financial position strong?
- Could you handle increased interest rates or market downturns?
- Have you invested in this sort of asset before and understand its risks?
More tips on borrowing to invest
How do you avoid big mistakes?
Do what’s right for you, and don’t let others pressure you into something that makes you feel uneasy.
Steer clear of ‘all or nothing’ gambles, ‘get rich quick’ schemes and high-priced financial gurus with the ‘secrets of unbelievable wealth’. Most are a waste of money or outright frauds. Read our warnings about get rich quick schemes and seminars and scams and swindlers
More information
