Investing can be daunting for anyone who’s never done it before, beyond putting their money into a high-interest savings account (that may not even keep up with inflation).
But investing doesn’t have to be scary, in fact it should be exciting, because at the end of the day you’re growing your wealth. The trick to it is understanding the basics, so we’ve pulled together five fundamentals that’ll help you manage your money in the market.
Here are five rules to live by when it comes to investing.
Be consistent with investing
For many people, the biggest barrier to investing is timing. They’re not sure when to start investing, and once they’ve started, they’re worried about the best time to buy and sell.
The simple truth of the matter is that no one can accurately predict the timing of the stock market. Spreading your investment by investing set amounts over regular intervals is a better strategy than trying to time the market.
This practice is known as dollar-cost averaging and it helps smooth out the peaks and troughs of the stock market. Learn more about dollar cost averaging.
How much should I invest?
A good rule of thumb to invest by is the 50/30/20 philosophy. This means that 50% of your income should go towards needs such as food, rent and utilities, 30% should go towards wants like travel, brunch, books and live gigs, and 20% should go towards savings/investing. This last 20% is you looking out for your future self, so you don’t have to skimp on ‘wants’ (or even ‘needs’) later in life.
Our free financial health check can do the math for you and figure out how much you should spend, save and if you’re ready to start investing.
Don’t put all your eggs in one basket
Diversification is the process of spreading your investments as opposed to investing in just one company or a stock. Diversification helps you avoid unnecessary risks, and reduces your losses on any one investment.
If you don’t diversify, there’s a much higher chance of loss. If you spread your money over a range of different asset classes (so various stocks, bonds and securities) according to your risk profile, you’re substantially minimising your risk of loss. Learn more about why you should diversify your investments.
The good news is, if you’re young you have more time, which means you can afford to take on more risk (such as a higher portion of stocks in your portfolio). This is because the market has more time to recover from any falls and grow.
When it comes to building a diversified investment portfolio, you need to understand your personal risk profile. Learn more about your risk profile through our free risk questionnaire.
Minimise your costs
Whether you choose to manage your own investments, or get someone else to do it for you, it’s important to keep your fees low.
Small differences in costs can have a significant impact on your returns over the long run.
Different kinds of funds also have different kinds of fees, so it pays to be aware of how much it costs to manage them. For example, exchange traded funds (ETFs) tend to be less expensive than actively managed mutual funds and many index funds. However they all have their financial pros and cons when laid side-by-side.
Have a plan
A simple yet well disciplined framework is the best way to guard against emotional decision making when it comes to investments. Markets will go up and down and fear and greed will drive your decision making unless you have a plan which you can stick to.
Simplicity beats complexity when it comes better outcomes in investing. Don’t try and come up with complex trading strategies which try to time every move in the market. Such strategies almost always lead to poorer outcomes over the long term, especially when you take into account the trading costs and tax impacts.
Come up with a simple plan which you know you can stick to, especially when markets are volatile. If you do not have the knowledge and time to create your own plan, then use a financial advisor.
Again take costs into account, when looking at financial advisors. Online advisors, often called robo-advisors are a great way to access quality financial and investment advice at low costs. The other advantage of robo-advisors is that by using technology to implement a well disciplined investment plan, they take the emotional decision making out of investing.
Learn to juggle time & risk
The younger you are and the longer your investment timeframe, the riskier you can afford to be because there’s more time ahead of you to account for dips in the market. Compounding will work wonderfully in your favour.
Adjusting your risk over time as you get closer to retirement so that you have a smaller portion in riskier stocks is a smart way to minimise the chance that a big fall in the stock market will wipe out your investments when you are a day away from retirement.
This also goes for other financial goals. If you’re saving for a house deposit, estimate how long it will take you to get there. Based on the timeframe, you may be able to take more investment risk in the early years and dial down the risk as you get closer to your target date.
While this may all seem a bit overwhelming for someone who’s fresh to investing, the good news is that you don’t have to do it alone; there’s a wealth of investment assistance out there, from simple guides to investing (like this one), through to financial advisory services (like us) who can completely manage a portfolio for you.
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Also published on Medium.