A BEGINNER’S GUIDE TO INVESTING – THE BASICS!
For those of us who intend to have something to retire on…..
An investment utilises existing capital to grow your money, whether this is achieved
through investing in financial vehicles that generate income, or alternatively create
capital gains.Among the many investment classes on offer are cash, shares, trusts,
bonds, managed funds, property, art or business opportunities for shrewd financial
players such as venture capital. Planned diversification across a number of investment
areas is a time-honoured route to long term wealth creation.
WHAT IS THE PURPOSE OF INVESTING?
Everyone has different financial goals, which again differ at various stages of life. A
student leaving university will have very different ideas about handling their finances
than parents raising three children on one salary with mortgage commitments.
One common purpose is having enough money saved for retirement years. With most
of the world’s Western countries’ populations aging and birth rates steadily dropping,
there is a shrinking workforce to contribute to retirement pension schemes. For the
large numbers of baby boomers moving towards the latter part of their working lives,
and living longer with lifestyle and healthcare improvements, investing individual
savings is therefore a necessity in order to accumulate retirement funds.
To establish your own investment goals and strategies, take stock of factors including
your current assets and debts, your earnings now and your income projected over
future years. Factor in any funding sources you may have ahead, such as a family
property, long service pay-out, or an inheritance (lucky you!).
Think about goals that are important, which might include going back to study,
starting a business, or paying for a child’s post-university overseas trip. How much
will they cost? What level of funds will you need set aside for your own retirement?
When deciding on an investment strategy, there are a number of factors to bear in
mind, including what level of risk is comfortable to achieve desired returns, the time-
frame available and how tax impacts on the selected investment classes. Look at
whether you need to access funds in the interim, on your way to long term savings.
INVESTMENT OPTIONS
Educate yourself on the various investment classes and options that are available on
the market. Remember that diversification is one of the fundamental rules for
successful investing. By spreading, and therefore minimising risk, across various
investment types that will individually perform with different degrees of success, the
chances of good returns are maximised.
Managed funds provide small investors with the opportunity to combine their
respective funds in a sizeable diversified portfolio. The fund is then managed on their
behalf by a qualified fund manager or investment team. These funds can be structured
to pay in as little as $100 monthly, after an initial $500 - 1,000 investment, providing
access to sectors that were previously out of reach for smaller investors. The funds’
assets are split into units divided between its investors, with profits redistributed
regularly to these investors, who can opt to accept the income or reinvest their
earnings to build their investment growth. Managed funds primarily invest in the
major asset classes of cash, local or international shares, property and bonds.
Shares, which are part-ownership of stockmarket-listed companies, are traded on the
Stock Exchange, allowing investors to maximise their initial capital investment.
Because of their potential for strong returns, shares are regarded as growth assets.
Compared with other investment classes, shares traditionally perform better over the
longer term and surpass inflation rates, offering investors the potential for higher
profits, dividends declared from the company’s post-tax profits and tax benefits via
imputation credits on those dividends.
Trusts pool investors’ funds to establish a sizeable fund investing in sectors that
investors could usually not access individually. The trust is professionally managed
by a fund manager who is responsible on its investors’ collective behalf for all
investment decisions. In a trust, each person’s funds are calculated equally and
referred to as units, with the unit price dependent on the performance and accordingly,
the value of that particular trust’s investments. The unit price will fluctuate in
response to market movements for these investments. There are a wide selection of
unit trusts available to individual investors, some specific to one sector and others,
sometimes called managed trusts, covering a mix of asset classes.
Venture capital is investment, through equity or sometimes debt arrangements, to
fund primarily private companies requiring financial backing to grow. In return for
their financial contribution, the investor receives a negotiated stake in the company
and usually a seat on the company’s board. In addition to funds, investors also usually
invest further by advising the company’s management and sharing their own skills
and knowledge, while they share in its future revenues and growth. A venture
capitalist is looking for a business that has a strategic fit with their investment criteria,
is in its early development phases and has strong growth potential. A common
objective is to see their investment yield a high capital gain on exiting.
Property is a common investment choice, with its established returns of income and
capital gains. Investments in real estate can be a house or unit as a home, an
investment property or holiday home, industrial properties, commercial offices and
office buildings, or retail outlets and shopping centres. Investment can be direct, or
via alternative methodologies including property trusts, property syndicates and direct
shares in property companies listed on the stock exchange. Other types of real estate,
such as residential and commercial rental property, have the potential for regular
rental income and long-term capital gains.
Futures
Futures are a contract that specifies a future date of either delivery or receipt of a
specified quantity of an underlying asset or product, at the price that was contractually
agreed. Futures provide a hedge against unfavourable price fluctuations, protecting
investors against such adverse shifts in share prices, or interest rates. There are
international futures markets in financial instruments and in commodities including
oil, wheat, soybeans, metals and pork bellies. Financial futures available to investors
include futures in bank bills, Share Price Index (SPI) futures and government bond
futures. As well as investors, futures markets attract speculators seeking out profits
from price movements.
Options
An option is an investment type that gives its holder the right to buy (a ‘call’ option)
or sell (a ‘put’ option) a specific derivative security at an agreed price within a
specified timeframe. The call option holder is looking for the stock price to rise, while
the put option holder wants the price to fall, in both cases by a margin below the
‘strike price’ which provides the profit that the investor is seeking when the option is
exercised. Retail investors are able to buy and sell options on various financial and
futures products. If the option is not exercised during the timeframe, the investment is
lost.
Debt
Debt is the generic term for bonds, mortgages and other financial instruments that
have been loaned and are structured for repayment. Known as ‘fixed interest‘
investments, these attract investors looking for an investment offering greater security
than shares or property, while providing stronger returns over time than cash
investments. Fixed income securities promise the investor with periodic income, with
interest normally payable on a semi-annual basis.
Collectibles
High net-worth individuals and serious collectors also choose to accumulate wealth
through planned acquisition of ‘collectibles’ that can later be sold, often at a much
higher value if their original investment was well-considered (or lucky). Some
collectors invest or trade in fine art, contemporary art, antiques, vintage cars or
jewellery.
SOURCES OF INVESTMENT ADVICE
Investment goals can be achieved without outside advice, but the majority of investors
will seek advice from professionals, whether on an ongoing basis for their investing
strategy, or on a one-off basis regarding a specific product or investment class.
Qualified financial planners help investors on an individual basis to work towards
financial security and build wealth. There are many stages of life when people seek
out the advice and support of a financial planner. These can include wanting to make
astute financial decisions, identify financial products that address specific tax
requirements; or leverage a major sum for healthy growth. Advice from financial
planners can be sought just for their opinion on one particular investment product or
asset class, or to handle a specific transaction. But as larger sums and goals are being
considered, professional financial planning is usually a wise decision.
Accountants are similarly an excellent source of professional investment knowledge.
Tax advice is primarily the focus for qualified accountants, as only a registered
taxation agent can provide full tax advice. Chartered accountants are not legally
permitted to provide advice on specific financial products on a fee basis, and their
focus is not on wealth creation.
An experienced, well-regarded broker can provide in-depth and astute information on
securities which will help build wealth and achieve either or both capital gains and /
or income over the long term. There are many brokers that work with individual
clients, providing their clients with regular advice, share tips, broking services and
market education.
It is the individual investor’s ultimate responsibility to research and understand their
investments. There is a wealth of information in the marketplace to help retail and
small business investors, from the daily financial papers to Internet investment sites
packed with information on financial matters, books, courses and advanced studies.
Educating yourself on investing and financial markets will give you a good basis for
planning out your long term investment strategy.
Teri Sawers
December 2001