What assets can you invest in?
Generally, you could invest in any of the four different groups of investments known as asset classes. These are:
The performance of these different assets can vary significantly over time, with the theory being that those with a greater level of risk should generally perform better over the long term, compared to those investments with a lower level of risk.
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How to know what to invest in?
When deciding what to invest in you need to ask yourself a few questions including?
- What is your tolerance for risk?
- What is your investment timeframe?
- What are your investment goals?
The answer to these questions should help you devise an investment strategy and what investment products suit your needs. Consider someone saving for their first home with an investment timeframe of five years. The benefit of a high growth asset, such as shares, might be attractive to them as it may maximise the house deposit at the end of the period. However, the risk is that just before achieving their goal, the market hits a downturn which puts them back a whole year in savings. Over the long term these downturns can be overcome by subsequent rallies in the market. If you don’t have the time to wait for those rallies it can leave your nest egg significantly depleted.
If you are unsure of which direction you want to head with your investments, it might be helpful to look at tried and tested investment strategies. Two popular strategies you may want to read up on are value investing and growth investing.
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How much do you need to start investing?
How much you need to start investing depends on what you have chosen to invest in. Here’s what you need for the some key investment products:
Stocks and ETFs: It depends on your brokers buy typically the minimum amount you will need to start investing is $500
Managed funds: Generally, you can start investing in a managed fund with $1,500. However, there are some providers that allow you to invest with $1,000 as long as you have a savings plan as well.
Property: The deposit required to buy a property is usually 5-10%.
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What are the risks with investing?
Some form of risk is inevitable when you invest. Typically, the riskier the investment the higher the returns, and vice versa. If you are considering investing it is important to be familiar with the risks involved. Here are the four main types of investment risk:
Market risk:
Market risk is the risk that the value of an asset may decrease due to changes in market factors. Market risk is an umbrella term for equity, currency and interest rate risk.
Counterparty risk:
This risk refers to the possibility that the opposite party (also known as the counterparty) you’ve entered into a contract with will not honour their contractual obligations. Most financial transactions will carry an element of counterparty risk. However, investors are generally exposed to this type of risk when investing in fixed-income assets such as bonds.
Concentration risk:
Concentration risk is when an investor’s portfolio is not diversified to spread risk and safeguard against changes in the market. An example of concentration risk is when an investor’s portfolio is made up of only one entity.
Liquidity risk:
Liquidity describes how easily an asset can be bought or sold in a market place without affecting the asset’s price. Liquidity risk refers to the risk of not being able to sell an asset fast enough to avoid a loss.
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How to start investing?
When you have your investment strategy down pat and know what you want to invest in, the question is: how do you start? To access many investment products from stocks, ETFs, managed funds, bonds etc.) you will need a broker. You can go directly to a broker who can handle your investments or you can sign up to an online share brokerage. Cash and some fixed income securities can be accessed through a bank, building society or credit union.
Related article: Online share trading platforms for beginners
To learn more about investing, check out Canstar Investor Hub.
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