Investment understanding the basics

Understanding the basics

Understanding the basics

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?

Five simple tips to start investing

  • Identify your personal and financial goals
  • Make a budget, and work out how much you have to invest
  • Work out what sort of investor you are, and how much risk you're willing to take
  • Start investing. The sooner you start, the sooner you'll reach your goals
  • Get good advice. A financial adviser can develop a plan tailored to your personal needs and goals.

What am I trying to achieve?

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.

How much do I need to invest?

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.

Why is a budget important?

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:

  • identify surplus money that can be used for investing
  • see where your money is being spent, and help you decide whether to continue spending money in the same way, or reduce your outgoings and increase your savings
  • cope with surprise expenses
  • manage your finances, and give you more confidence in your financial future.

What sort of investor am I?

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:

  • How much do I need to reach my goals?
  • Do I have a good understanding of the financial markets?
  • What sort of return do I want on my investments – stable, fast-growing etc.
  • Am I willing to take a risk to achieve a higher rate of return on my investments?

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.

What’s the relationship between risk and return?

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.

What are asset classes?

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

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

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

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

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.

What is a managed fund and how does it work?

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:

  • Diversification – invest across a range of asset classes
  • Access to experts – who make and manage the investments on your behalf
  • Convenience – paperwork and administration is handled by your fund manager
  • Access to major investment classes – a managed fund can give you access to international and local investment opportunities
  • Economies of scale – managed funds possess buying power when the dollars of investors are pooled together which may not be available to the individual.

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.

Tips, tools & strategies

Whether it’s your own retirement savings, or group super for your employees, it pays to understand the ins-and-out of how superannuation works.

Five simple rules for investing in volatile markets

As we’ve seen in recent times, investment markets can change overnight. But there are some simple rules that investors have been using to help build long-term wealth for decades.

1. Stay calm

Do not rush any investment decision.

2. Diversify your investments

It’s notoriously difficult to predict what’s going to be the best-performing asset class in any given year. Diversifying investments across asset classes allows you to benefit from each year’s best performers. It can also help you smooth out the volatility of your returns.

3. Spend time in the market

One of the most powerful features of long-term investing is the ability to benefit from compound returns. By staying invested, as opposed to regularly entering and exiting the market, your investments have more time to grow and earn returns on your returns.

4. Monitor and review your investment strategy

Like most things in life, it’s a good idea to regularly review your financial plan to make sure it’s still right for your current financial situation.

5. Seek professional financial advice

A financial adviser can help ensure your strategy meets your needs, and even help you update it as your circumstances change. With a clearly defined strategy and goals, you can have the confidence you need to withstand market fluctuations.

The magic of compound interest

Trying to predict the best time to enter the market can be impossible. Dollar cost averaging is one useful technique to help iron out the ‘ups and downs' of the sharemarket.

Instead of buying $6,000 in shares at one point in time, you may choose to spread your investment across regular time periods – e.g. $500 every month for a year. By spreading your investment over time, you take away the problem of attempting to determine the ‘top' or ‘bottom' of the market.

For an example of how dollar cost averaging works take a look at OnePath's Investment Fundamentals (577kb), and ask your financial adviser if it's a strategy that's right for you.

Don't just save. Invest.

Saving and investing are not the same thing. Saving is holding your money to use in the future, instead of spending it now. On the other hand, investing is putting the money you have saved to work.

The ultimate aim of investing is to grow wealth, but you can also generate income from your investments. So why not put your savings to work, and make the most of them by investing?

Are your finances in good shape?

Being financially fit is about making sure all aspects of your financial situation are in order. Take our financial health check (913kb PDF) to see which areas of your finances are healthy and strong, and which might be up for some improvement.

Investments and the current market

Whether it’s your own retirement savings, or group super for your employees, it pays to understand the ins-and-out of how superannuation works.

How do I make the most of my investments in this market?

With sharemarket volatility a daily part of news headlines, it's only natural to be concerned about how the fluctuations might be affecting the value of your investments. It can also be tempting to move your money into less risky investments.

The best way to keep your investments safe in times of volatility is to follow these five simple rules:

1. Stay calm

Do not rush any investment decision.

2. Diversify your investments

It’s notoriously difficult to predict what’s going to be the best performing asset class in any given year. Diversifying investments across asset classes allows you to benefit from each year’s best performing asset classes. It can also help you smooth out the volatility of your returns.

3. Spend time in the market

One of the most powerful features of long-term investing is the ability to benefit from compound returns. By staying invested, as opposed to regularly entering and exiting the market, your investments have more time to grow and earn returns.

4. Monitor and review your investment strategy

Like most things in life, it’s a good idea to regularly review your financial plan to make sure it’s still right for your current financial situation.

5. Seek professional financial advice

A financial adviser can help ensure your strategy meets your needs, and even help you update it as your circumstances change. With a clearly defined strategy and goals, you can have the confidence you need to withstand market fluctuations.

Take a look at OnePath's Market insights which has market updates, expert opinion and webcasts to help you make sense of the markets.

It’s also a good idea to talk to your financial adviser. They can help you work out a clearly defined strategy that meets your goals, and gives you confidence when markets are volatile.

Is the bank a better choice for my investments?

While it can be tempting to jump out of your investments in volatile markets and keep your money in a bank account, doing so can have a big impact on your long-term savings goals.

For starters, jumping out of investments after a downturn essentially turns ‘paper’ losses into real losses. It also robs your investments of a chance to recover.

History shows us that investors who stick to their long-term strategy tend to come out ahead. Despite short-term crises, sharemarkets historically recover and make gains over time.

If you're worried about the safety of your investments, talk to your financial adviser to make sure that the strategy you have in place still meets your future needs and goals.

What do the next six months hold for the financial markets?

While no one can predict what will happen in financial markets, it's important to remember that there will always be movements. In the last year or so we have experienced volatility, but OnePath and other economic and financial experts believe that the markets will return to stability.

History has shown us that markets will always fluctuate. But it has also shown us that the longer you stay invested, the less affected you are by short-term volatility.

For market updates, expert opinion and economic webcasts, take a look at OnePath's Market insights. The information is designed to keep you up-to-date, and help you make sense of what's happening in the markets.

Are my investments safe with OnePath?

You can be confident your investments are secure with OnePath.

OnePath is a financially strong and profitable business that is well placed to weather market turmoil. OnePath (and our predecessors ING and Mercantile Mutual) have operated in Australia for more than 130 years. We have withstood many changes in the markets (including the Great Depression) and have gone on to create opportunities and grow our business.

Our key focus is to support and provide services to our customers, and we are also working to build business across our core markets of superannuation, investments and insurance.

We are a leading and trusted brand in financial services, being the third largest life insurer and the six largest retail fund manager in Australia.

Our goal is to help Australians grow and protect their wealth, and we are here for our customers through all market cycles.

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.