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.
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.
The sooner you start investing, the better. That’s because of the powerful effects of compound interest. Say you invest an initial amount of $1,000 today. Then you contribute $100 every month into a managed fund that earns 8% p.a., in 10 years' time, you would have $20,071. If you started investing the same amount three years later, you would only have $12,708.
The longer you invest, the longer you have to benefit from compound interest, which is why it’s important to start investing sooner rather than later.
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?
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.
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.