I’m asked regularly what’s the best way to get started investing and what is the safest investment to choose. Whilst the question itself seems simple enough, the answer can be long and convoluted with all sorts of warnings and disclaimers.
What makes the answer even more confusing is when the simple question gets asked to more than one person then there can be more than one answer and quite possibly they can all be correct!
The trick is to find out which one is correct, specifically, for you?
Find your Investor Profile
An investor profile or risk profile as it’s sometimes called, is essentially a reflection of your tolerance of and your attitude to investment risk. There are many risks that can affect your investments such as inflation, politics, liquidity & concentration to name a few but if you’re investing in a quality asset then some of these risks are reduced quite significantly with the major one remaining being market risk.
Market risk predominantly refers to the price of your investment declining due to economic developments affecting the whole market.
The greatest way to manage market risk is to ensure that your exposure is aligned with your reason for investing and then to be patient enough to wait till your investment price rises again.
An Investor Profile questionnaire can help you develop just how comfortable you are with exposure to assets that can have much higher returns for you over the long term but much greater volatility in the short term.
A higher investor profile rating will likely mean you can handle having a lot more shares and property in your portfolio and sleep well at night even if your portfolio has dropped!
What is your structure
Many people like to think that to get ahead they need to buy an investment property but then are confronted with the purchase price, the loan needed to buy it, the income needed to pay off the loan and then the fees from agents and solicitors followed by taxes to those who think they can spend your money better than you can.
A convenient alternative is to turn to a diversified investment portfolio which can include a mix of high-quality shares, property, bonds and cash. These portfolios can give you exposure to markets that align with your investor profile, grow over time and pay you regular distributions and you can start with small contributions as low as $100.
There are several different versions of a diversified investment portfolio – they can be a listed investment company, an exchange traded fund or you can invest directly with a managed fund provider.
All have fees though some are definitely less value than others and seem to support the purchase of expensive suits and cars for the fund managers rather than provide you with a brighter future. Fees of 1% in total are what we see are an absolute maximum however if you have a relatively small investment and there are fixed fees in your investment then you may exceed 1% in the early days. As your investment grows then your fee expressed as a percentage should drop.
Use the suggested asset allocation (ie the balance between growth assets like shares and property vs defensive assets like cash, bonds and term deposits) to find a suitable diversified investment portfolio.
Once you have your investor profile and the resulting asset allocation and then you have found yourself a high quality, low-cost diversified investment fund then it’s time that you stop your planning and start taking some action.
How much are you starting with? Are you going to make regular contributions or just the one lump sum? What can you invest and contribute that ‘today you’ doesn’t need but ‘future you’ will thank you for?
You can think about getting fit or eating better or learning more but until you do something about it then you’ll never get closer.
If you need help then talk with a qualified financial adviser, join an investing club or work with a friend that you know will hold you accountable to taking some action.
There are an awful lot of smart people that achieve nothing because they do nothing and you don’t need to be one of them.
What are you aiming for?
To invest safely and securely follow these three steps and you can build a portfolio that will help give you peace of mind and financial security:
- Attain your Investor Profile
- Find your high quality, low cost diversified investment fund
- Take action!
Remember the education from your investor profile research that says the higher allocation you have in growth investments like shares and property then the longer the time you may need to get the return that you want. If your investor profile and timeframe points you to a high allocation to shares and property then remember you need to be very patient.
Make sure that what you’re doing aligns with some personal goal of yours so that sticking to your plan is more meaningful and you are less likely to be tempted to sell out when the time is not right.
Time will pass relentlessly regardless of what you do with it so you may as well do something useful.
Get started, be patient, future you will love you.