If you are on an average salary you are likely to earn over a million dollars during your lifetime. Sounds great, but it’s what you do with your money that will determine how well off you will be in your later years.
Traditionally, women as a group have been cautious investors, although this is gradually changing. You might already be a good saver with a regular, disciplined approach but be reluctant to take the next step, from being a saver to an investor. Don’t be daunted. Investing is not complicated if you take a little time to understand the basics – you might even enjoy it. Remember, you don’t have to be wealthy to be an investor. Think of it the other way around. You have to be an investor to be wealthy. And you can start investing with as little as $1,000.
(1) UNDERSTANDING INVESTING Investing simply means buying something with the aim of earning an income from it or making a profit on it in the future. Investing takes time and careful planning, and shouldn’t be confused with a get-rich-quick scheme. A better approach to investing is to regard it as a long-term, “get-rich-slow” process. The earlier you begin, the better the head start you’ll have.
The sheer range of available investments and the terms used to describe them can be overwhelming, but when you get down to it there are four broad types of investment:
- Fixed interest;
- Property; and
Cash: in investment terms, “cash” means money that is at call and can be accessed within 24 hours. Cash is typically invested in bank accounts or cash-management trusts.
Fixed interest: you invest your money for a longer period at a pre-arranged, fixed rate of interest. Fixed-term deposits and most bonds fall into this category.
Property: can either be an investment property, your own home or a block of land. Some investors are becoming interested in alternative property investments, including commercial, retail and industrial property.
Shares: also known as equities or stocks, these enable you to become a part owner in a company. These are typically purchased through a broker or a stock exchange. (There are other types of investment that fall outside these four mainstream types. Works of art, gems, stamps, racehorses, coins, and fine and vintage wines are good examples. These types of investments are considered to be more exotic and tend to be regarded as riskier. This is because of uncertainty over whether they will increase in value or whether there will even be a buyer for them when you decide to sell.)
(2) DIVERSIFY, DIVERSIFY, DIVERSIFY This is the old adage about not putting all your eggs in one basket. If possible, spread your risk around by dividing your money among several different asset classes.
Most of the developed world continues to have a love affair with property but when the property market is viewed as overheated,it may be prudent to consider diversifying into other areas. This is because various types of investment perform differently at different times.
Different factors effect the price of property and shares, and whilst they may both peak and boom, rarely do their peaks and troughs match. For example, in increase in demand for minerals used in construction, will increase the price of shares in mining and resource stocks, but the the high cost of materials may cause the cost of building houses up. Property prices will rise, an on the back of recent valuations, this can cause an artificial increase in the market, as others seek to sell their houses at this or higher levels. At some point, the market reaches a point where rental returns are out of step with prices being paid. An interest rate rise will prompt sales at lower rates, then all the prices fall as bank valuations take into consideration recent sales, many made in a desperate bid to leave the market. IN such a situation, house prices may crash dramatically, and stay depressed for a long time.
All this time, in a mini boom and bust in the property market, resource stocks may have stayed high, or not.
If we look back to when the property market fell in 1989 and 1990 in Australia, investors heavily invested in property were more likely to lose money than investors with an even spread of investments across fixed interest, cash and shares.
Having a mix of investments can offset losses.
(3) THINK ABOUT TIMING Consider it this way. When a store has a sale, shoppers flock to the bargains. When a store raises its prices, shoppers steer clear. Yet many investors don’t apply the same logic when it comes to investing, particularly in the case of share markets. When share prices fall, some investors panic and hasten to sell out. even though the market is cheapest after a fall. When the market is performing well and share prices are rising, investors tend to rush in, not wanting to miss out, disregarding the fact that they may be buying shares at inflated prices. Rather than chop and change when returns vary in the short term, be patient with a view towards long-term rewards.
The important thing to remember is that time in the market generally has a far greater impact on investments than market timing. Someone who invested in the US stock market the day before the 1987 crash would have watched their investment fall 25 per cent the next day. But they still would have averaged 11.5 per cent per annum over the next five years: a very healthy return (Standard & Poor’s 500 Acc Index). It’s not the timing of the investment but the time invested that counts.
(4) GET SOME FINANCIAL SAVVY A successful investor keeps an eye on the investment landscape. Keep informed about the economy, property prices, interest rates and markets. Doing your homework will assist you in making informed decisions.
Women in particular should make an effort to become financially aware. If you are single, it’s important to make provisions for your own financial security. Controlling and understanding investment and finance is an essential life skill these days. Even if you are in a relationship you shouldn’t rely on your partner. It’s easy to take a back seat when it comes to managing joint finances, especially in situations where your partner earns more. But if you separate from your partner and you need to organise your finances in a hurry, you might not know where to start. One way to become more confident about managing your finances is to enrol in one of the many financial courses on offer. The Australian Stock Exchange (www.asx.com.au) offers a range of classes for beginners and the more advanced at venues around Australia. The ASX also holds investor days where you can meet with industry professionals, financial commentators and ASX experts.
(5) DON’T BASE FUTURE EXPECTATIONS ON PAST PERFORMANCE When selecting investments, remind yourself that simply because a particular investment has done well previously, there is no guarantee that it will continue to do so. It is also unlikely for the one broad investment type to have the best marketwide performance for two years running. Before you put your money in the investment type that performed the best last year, stop to consider that it probably won’t be the best performed type again this year. Numerous unforeseeable factors, from legislative changes to interest rate hikes, may affect the performance of an investment. So while you should consider an investment in light of present circumstances, keep monitoring the situation in case it changes. Do be careful, though, to avoid “chasing returns” – moving your portfolio to the investment type that had the best performance last year.
ENRON, did well for ages. Virign records did fabulously when CD’s came out, and everyone swapped over to this new technology from vinyl, but now all music publishers are suffering from digital downloading taking over from physical sales. IBM shares rose by about 10% in 2006. Great huh? Sure, if you bought your shares at the start of the year, rather than 4 years ago. Their share price is now back to around half its value before it tumbled in 2002. So where is it going now?
You need to look at the likely future of a company and the industry it is in, not just its history.
(5) WORK OUT YOUR ATTITUDE TO RISK All investment involves some degree of risk. As a general rule, the higher the potential returns, the higher the risk. Everyone has a different appetite for risk, depending on your personality, personal circumstances, your age and stage of life. Investments such as shares tend to fluctuate more in the short term, but can generally be expected to realise higher returns in the long term. On the other hand, investments that have the least fluctuations, like cash, can only expect a relatively low return over the long term. In fact, choosing to risk nothing can be the riskiest option of all. If you opt to keep your hard-earned money in a mattress or a bank vault you are not putting your money to work. You risk the value of your cash going backwards as it is whittled away by inflation. When considering how much risk to expose yourself to, ask yourself whether the investments to which you’re attracted will get you where you want to be financially.
Resolution 1: identify your goals. It’s difficult to be motivated if you are not working towards something concrete and achievable, so find a real reason to manage your money. In other words, have a few goals to work towards. Make your goals realistic and achievable.
Resolution 2: make a budget. A budget is not about depriving yourself. In fact, it should have the opposite effect. The next time you splurge on a new outfit or an expensive restaurant, a budget will remove any niggling doubts about whether you can afford it or not. A budget should be realistic and flexible, otherwise it simply won’t work. Identify a couple of areas to cut back on.
Resolution 3: pay off the credit card bills. Don’t just make the minimum monthly payment, as you will be incurring a high level of interest on the outstanding balance. Consider paying for things with cash instead.
Resolution 4: consolidate your super. Most of us have multiple super accounts from previous jobs. Instead of multiple fees and mountains of paperwork, track down your super and roll it over. BT (13 21 35) has a free super consolidation service (a minimum of $2,000 may apply). With nine per cent of your salary going directly to super, it will grow to be one of your largest investments, so it’s definitely worthy of your attention.
Resolution 5: start investing and stay invested. There is always a “good” reason for not investing, but there is actually an even better reason to start investing right away. In fact, starting sooner rather than later is one of the best investment decisions you can make.
Resolution 6: Get advice. You use specialists every day: you go to a hairdresser for your hair, a doctor for your health and a dentist for your teeth. When it comes to your money, shouldn’t you consult another expert? A good adviser can help tailor an investment plan to your particular circumstances, and he or she is also likely to know about what opportunities are available. Your adviser should help steer you in the right direction, while taking care of the day-to-day management of your investments and they should hold an investment advice qualification and certification as is relevant to your country.
When choosing an adviser it’s important to make sure that you are confident in that person’s expertise. Don’t be shy about asking questions and choose someone you feel comfortable with, as this is likely to be a long-term relationship.
Jasmine is one of the owners of Mybaby.net.au, a WAHM and prolific baby and parenting writer.