What is investing? – explore when and how to invest
Investing could be a smarter way to save and build your nest egg. But what’s the difference between saving and investing?
When you save money, you’re putting it into a relatively safe place to use in the future. Saving can be likened to ‘deferred spending’, for example saving for a holiday.
When you invest your money, you’re making an active decision to put your money into an asset with the aim of generating a profit.
All investing involves risk and different types of investment involve different levels of risk. As well as making a profit, you could also experience a loss.
Your investment goals, the level of risk you’re willing to take and your investment timeframe can all influence where you choose to invest your money.
You may have a property dream, want to set your kids up for the future, or be looking to save more so you can live comfortably in retirement.
If you’re wondering where to invest money to get good returns, the answer is that it depends on many factors and there’s no one-size-fits-all formula for a successful investment strategy. Whatever your goal, remember there are risks attached to investing as returns aren’t always guaranteed. You could make money, break even, or even lose money should your investment decrease in value.
With that in mind, here are some tips on investing for beginners and investment opportunities.
Where you could invest your money
Here are some of the more common types of investment.
1. Cash investments
These typically provide stable and low-risk income, but the income return is generally also lower. Cash investments can be held with a bank where you can get regular interest payment (such as in a term deposit), but it may also be managed like a managed fund. These may be a good option if you’re risk averse or working to a short timeframe or for the ‘liquid’ part of your portfolio.
2. Fixed interest investments
Governments and companies (both in Australia and internationally) can issue fixed interest investments (or bonds) for you to buy. If you purchase a fixed interest investment you are basically loaning money to the issuer of that fixed interest investment for a certain period of time in exchange for regular interest payments. At the end of that period of time (called the maturity date) your initial investment is returned. There are a number of types of fixed interest investments which have different levels of risks.
If you purchase shares (also known as equities or stocks) in Australian or international companies, you’re essentially buying a piece of that company, making you a shareholder. Depending on how the shares perform, your investment may increase or decrease in value. There are a number of direct and indirect ways of investing in shares, including the following:
- Initial public offerings (IPOs) – Buying new shares from a company that are on offer to raise capital for that company
- Managed funds – Your money is pooled with other investors and a fund manager buys shares on your behalf
- Exchange traded funds (ETFs) – Invest in a group of shares that make up an index, such as the ASX200
These are just some of the avenues through which you can invest in shares, and deciding on the best method will depend on your financial goals and circumstances.
If you invest in property directly, whether it’s a piece of land or a building (residential or commercial) and rent it out as opposed to being an owner-occupier, you’ll generally receive a rental income, while potentially building equity in the property at the same time.
Common investment structures
Investments within these particular asset classes (cash, fixed interest, shares and property) can either be held individually, or via a number of common investment structures.
Some of the more common investments structures or vehicles include managed funds (where your money is pooled with that of other investors), superannuation (including self-managed super funds), as well as alternative investment vehicles like exchange traded funds.
What is diversification and why it’s important
When building an investment portfolio, you may want to spread your investments across a number of different asset classes. This is known as diversification and follows the principle of ‘not keeping all your eggs in one basket’. This can help to reduce your overall investment risk, so if your portfolio is well diversified, it means you’re less exposed to a single economic event. That being said, if one sector or asset performs badly, you won’t lose all your money.
How to start investing
The majority of us are already investors through our super and bank accounts.
When looking to invest, either on your own or with the help of a broker or financial adviser, get started with the help of these steps:
- Work out your current financial standing, and how much can you afford to invest.
- Work out your goals and when you want to achieve them.
- Consider risks and implications for the short/medium/long term.
- Decide if you want to invest yourself or with help.
- Ensure you understand what you are investing in.
- Track the performance of your investments and adjust your strategy accordingly.
Make sure you read the product disclosure statement (PDS) for each investment product and that you understand the product’s key features, fees, benefits and risks. You can ask the product provider or your financial adviser if you need help.
What to think about when investing
The amount you are taxed can affect the overall return you get from an investment. This can include income tax, capital gains tax and other taxes.
How your investment is taxed and the implication on your returns varies between different investment options and whether you hold the investment personally (ie in your own name) or through a different structure (such as your super fund).
Some tax considerations of investing may include:
- Income tax – This is the tax you pay on wages and any other income you receive – including interest and dividends stemming from your investments.
- Capital gains tax (CGT) – A capital gain is broadly the difference between what your asset costs to buy and what you sell it for. If you make a capital gain, some or all of it will generally be added to your other income and taxed at the same rates.
- Superannuation contributions tax – Any employer (Super Guarantee contributions) and salary sacrifice contributions are typically taxed at 15% (provided your income is less than $250,000 per year including super). Contributions tax will also apply to personal contributions which you make to your super fund and claim as a personal tax deduction in your tax return. (This is generally a lot lower than personal income tax rates which can make superannuation an attractive investment option. However, there is a limit to how much you can contribute each year and benefit from this favourable tax treatment.)
- Other taxes – These can include stamp duty and GST depending on which investments you’ve purchased.
Investment timeframes and risk
Different investment products are suited to different investment horizons or timeframes according to the level of risk they carry, and the potential returns they could provide.
- Short term is considered anything up to three years. For example, cash in a term deposit to save for a holiday could be a short-term investment.
- Medium term is considered between four and six years.
- Long term generally refers to anything over seven years. Long-term investments can help you build your superannuation savings and save for your retirement.
As a general rule, investments that carry more risk are better suited to long-term timeframes, as these often come with greater short-term volatility, which means they can change rapidly and unpredictably. However, being too conservative with your investments may make it harder for you to reach your goals.
Low-risk (or conservative) investments tend to have lower returns over the long term but can be less likely to lose money if markets perform badly. Cash and term deposits are examples of low risk investment options.
Medium-risk (or balanced) investment options tend to contain a mix of both low and high-risk assets. These options could be suitable for someone who wants to see their investments grow over time, yet are still wary of risk.
High-growth (or aggressive) options tend to provide higher returns over the long term but can experience significant losses during market downturns. These types of investments are generally better suited to investors with longer time horizons who can wait out volatile economic cycles.
What’s your attitude to risk?
Before making any investment decisions, you should consider your appetite for risk. Different types of investments carry with them different levels of risk, which can influence the returns you may receive.
To determine how much risk you’re comfortable with, you first need to work out your goals and the timeframes you want to achieve these in. For instance, if you’re in your 30s and your goal is to save for a comfortable retirement, you may be willing to take on more risk, as if your investment does decrease, you’ll have more time to potentially recoup your investment. However, if you’re planning to retire in only a few years, it’s less likely you’ll take on the same level of risk as you won’t have as long to earn back your investment should there be a downturn in markets.