Whatever your financial goals, investing can be a great way to help you achieve them sooner. But where do you start? And what types of investments are right for you?
If you're thinking of investing, the first thing you need to do is work out what your personal and financial goals are.
Identifying the things in life that are important to you – like owning a house, starting a family or having enough for the kids' education – will help you work out the lifestyle you want, and the amount of money you'll need to achieve it.
Understanding your goals will give you the basis for developing your investment or financial plan.
OnePath's financial health check (913kb PDF) can help you get started. By answering a few simple questions, you'll see what shape your finances are in, and work out where you might need to make some changes to meet your financial goals.
No matter how little you have, you can start investing for the future. The longer your investment has to grow, the better the results. Even if you can’t afford to invest a large amount, you may be able to start a small but regular savings plan.
The simple truth is that the only money you’re likely to save and invest is the money you don't spend. But many people only have a vague idea of how much they actually spend.
With a budget, you can see exactly where your money goes and how it's being used. This allows you to:
Once you've identified your personal and financial goals, and worked out the amount you have available to invest, you need to understand what type of investor you are.
All investments carry some form of risk, and you need to be comfortable with the amount of risk you are willing to take.
Talking to a financial adviser is the best way you work out your risk profile. But to give you an idea, ask yourself the following questions:
OnePath's Investor profile can help you answer these questions and work out how much risk you're willing to take. With this information, and an idea of your goals, you and your financial adviser can develop a plan tailored to meet your specific needs and financial situation.
Risk and return are closely correlated – higher risk generally means higher returns, while lower risk usually means lower returns. As an investor, this is known as the risk/return trade off.
Understanding risk and return is fundamental to achieving your investment goals. This is because understanding your risk tolerance will decide the type of assets you invest in.
Your financial adviser is the best person to help you work out your risk profile, and choose the investment options that best suit your needs.
Asset classes refer to different types of investments. There are four main asset classes you can invest in – cash, fixed interest, property and shares. The return you achieve, and the level of risk, is different with each asset class.
Cash is the generic term for investments such as short-term bank deposits and treasury notes. Cash is considered the least risky of the major asset classes – generally providing investors with a moderate regular income, but little chance of capital gain.
Fixed interest investments, or bonds, are effectively loans provided by investors to corporations and government bodies in return for interest payments over the life of the bond. Bonds carry a low to medium risk, and predominantly reward investors with a regular income stream – generally higher than that earned by cash investments.
Property is considered a growth asset, and involves investing in residential or commercial property, or via a listed property trust (LPT). LPTs invest in a range of property – including residential housing, shopping centres, office buildings, factories, and hotels. As property is a growth investment, capital gains may be expected over the long term, in addition to ongoing income from rent. Property is considered moderately volatile.
Shares are securities representing ownership of a company. When you buy a share in a company, you become a joint owner of the business. As a shareholder, you may enjoy the company's profits through dividends. You can also sell the shares, hopefully for a capital gain, sometime in the future. Shares are the most volatile of the major asset classes in the short term, but can outperform other asset classes over the longer term.
Investing in different asset classes is a good way to reduce risk. By spreading your funds across different asset classes you remove the risk of putting all your eggs in one basket – i.e. the risk that you will choose the wrong asset class at the wrong time.
A managed fund combines your money with that of other investors to form a single investment pool. Specialist investment managers then invest the money on behalf of the investors in a single asset class, or a range of asset classes.
The beauty of managed funds is that they can invest in a range of asset classes – including shares, property, fixed interest and cash. Exactly what type of assets your fund invests in depends on the fund’s objectives.
Managed funds offer a range of benefits including:
By investing in a managed fund, you can benefit from a diversified portfolio beyond what most investors could achieve themselves. You can also save yourself the time, cost and effort of managing your portfolio.
Your financial adviser can also explain how managed funds work, and help you select a fund to best suit your needs and risk profile.
This has been provided for general information purposes only. It does not purport to recommend any particular adviser or provide you with financial advice. In addition to seeking financial advice, potential investors must always read the Product Disclosure Statement for the relevant product before making an investment decision.