Planning is the key to successful investing. Creating a plan will help you find investments that fit your investing time frame and risk tolerance, to help you reach your financial goals sooner.
1. Review your finances
Before you invest, review your financial situation. Write down what you owe (your debts) and what you own (your assets).
For your assets include your *super, *home, *savings, other *investments.
Our net worth calculator can help you record this. Writing down what you own and what you owe will help you see what savings you can invest. It will also help you see how you can diversify. Then write down your income and expenses. Our budget planner can help you track what money is coming in and going out. This will help you see how much you can put toward investing regularly.
2. Set your financial goals
Write down your financial goals. For each goal include how much you'll need and how long you have to reach it. For example, taking a $10,000 holiday in one year, or reaching $500,000 in superannuation before you retire.
Then divide your goals into:
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short term (0 to 2 years)
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medium term (3 to 5 years)
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long term (5 years or more)
Setting and defining your financial goals will help you pick the right investment to reach each goal.
3. Understand investment risks
Investment risk is the likelihood that you'll lose some or all the money you've invested. This can be due to your investment falling in value or not performing how you expected. All assets carry investment risks — some are riskier than others. Risks that can affect the value of your investment include:
Interest rate risk
Interest rate changes reduce your returns or cause you to lose money. This is a key risk for fixed interest investments.
Market risk
An investment falls in value because of economic changes or other events that affect the entire market.
Sector risk
An investment falls in value because of events that affect a specific industry sector.
Currency risk
Currency movements impact your investment and returns. This is a key risk for overseas investments, Australian companies with overseas operations and investments that have foreign currency in them.
Liquidity risk
You can't sell your investment and get your money when you need to without impacting the price in the market.
Credit risk
A company or government you lend to will default on the debt and be unable to make the repayments.
Concentration risk
If your investments aren't diversified, poor performance in one investment or asset class can significantly affect your portfolio.
Inflation risk
The value of your investments doesn't keep pace with inflation.
Timing risk
The timing of your investment decisions expose you to lower returns or loss of capital.
Gearing risk
Using borrowed money to invest can magnify your losses. Your investments may fall in value but you still have to pay the remaining loan balance and interest.
Risk and return
As a general rule, the higher the expected return on an investment, the higher the risk of the investment.
The lower the expected return, the lower the risk. Lower risk means the returns are more stable and there is a lower chance you could lose money. For example, a government bond is a low risk investment. It pays interest, and the value of the investment doesn't change too much in the short term. Shares are a higher risk investment. The price of a share can move up and down a lot over a short amount of time.
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