For novices, investing can be a daunting task. When faced with contradictory advice and confusing terminology, not to mention tax rules, many choose to turn a blind eye to investment.
However, when done properly and armed with plenty of sound knowledge and advice, investing can be a great way to build on income and consolidate financial security.
Gemma Dale is the head of SMSF Solutions at NAB, and she says there are two major myths around investing: that it’s very hard or that it’s very easy.
The belief that “investing is impossibly difficult and scary; that investments are impossible to understand or too risky”, says Dale, paints an unrealistic “bleak picture”.
On the other hand, the expectation that investing is a breeze is also unrealistic.
“We often hear this in relation to property investing. Terms like ‘flipping’ don’t help – anyone who’s ever renovated will tell you there’s a lot of work involved!”
The same attitude can be applied to shares: “Hearing someone say ‘just buy x and it will double in value in two years!’ should make you nervous – it’s not impossible to make a lot of money easily, but it’s certainly not guaranteed and many people have lost money believing in grand promises.”
What’s the true picture?
The reality is most likely to fall somewhere in between the two myths.
“Investing is about buying assets you are confident will provide you with a good income, or increase in value over time, or both. These things are not usually guaranteed – you need to research your preferred assets and understand them well.”
Getting started can be the trickiest part of investing, especially for those who tend to be risk-averse. However, Dale says there are ways to get acquainted with the share market without being exposed to too much initial risk.
“First, start reading and educate yourself – there is so much fantastic information out there,” she advises.
“If you’re interested in shares, join an online broker and start looking at the research available. Start a watch list of stocks you like – it can give you a taste of investing without putting any of your money at risk. Look at different ways to access the assets you like.”
For those who don’t feel ready to pick their own stocks, managed funds or exchange-traded funds can be a good option. Novice investors can also consult experts for advice.
“If you are interested in investing in shares, talk to a qualified financial planner or stock broker,” recommends Dale. “They must be registered with ASIC [this is a minimum legal requirement] and should have higher qualifications and perhaps belong to a professional association.”
There are also many books, websites and television programs offering investment advice that can help beginners understand basic investment concepts.
Know why you’re investing
Ultimately, personal investing exists to help people facilitate their financial goals, and investment strategies can be tailored to personal goals.
“Firstly, define your objectives – are you saving for a holiday or investing for your retirement?”
Most people will have multiple goals – saving for a special event, paying off a mortgage or planning for a big purchase. Dale recommends outlining goals individually and the timeframe required for each. As a rule of thumb, Dale says, “the longer your timeframe, the more ‘risk’ you can take with your portfolio”.
For example, if you won’t retire for 20 years, some shares in more volatile areas like emerging markets could be worth considering as you have the time to ride out any fluctuations in the market.
“If you are saving for something short term, however, like a new car in a year, it’s best to stick to very low-risk assets like cash.”
Understanding the risks, but not overblowing them, can help novices begin to make the most of their money.
“By all means be prudent and choose investments within your risk tolerance, but don’t let your fears keep you from acting,” says Dale.
“Your future wealth depends on starting as early as you can, and continuing to build.”
For more information on NAB’s Start Counting program visit: www.startcounting.com.au.
Written by: Jessie Richardson