Investing 101: investment basics explained

Investing doesn’t need to be daunting – it’s just a matter of getting to grips with the central concepts.

Investing is the simple act of putting money into a financial asset with the goal of generating an income, making a profit or both. A financial asset is anything that has the ability to make money – think shares, property or term deposits.

Understanding the basics of investing is the first step in your wealth-creation journey. But actually putting those basics into practice is what will help you to create wealth over time, so it pays to start early.

“Investing aims to ensure our long-term financial security. This is important because investing is something that takes time. Patience is required to achieve financial success,” says Peter Rambert, a Senior Financial Adviser.

Types of investments

What you choose to invest in will depend on your personal requirements and goals, but investments generally fall into two main categories: those that generate or make a profit, and those that generate an income.

Many people hold both types of investments, which allows them to develop a diversified portfolio of assets.

Investments that generate growth or make a profit
Shares (also known as stocks) in companies, infrastructure (which includes roads, tollways, airports and railways) and property-based investments are all examples of investments that generate growth or a profit. You can also invest in managed funds and exchange traded funds (ETFs).

“With these types of assets, there is a risk that the value of your investments can go up or down in value. They tend to have less stable income returns because the predominant goal is to make a profit,” says Peter.

Investments that generate an income
Investments that produce an income include cash and term deposits, as well as bonds, which are investments that allow you to lend money to a company or government with the purpose of receiving a regular and predictable rate of return. These investments are also known as defensive assets

“The regularity of the return is what makes an investment defensive,” explains Peter.

As an example, let’s say you invest in a term deposit for six months. You can be certain you will get your money back, as well as a pre-determined amount of interest over the life of the investment.

Where to start

If you’re interested in investing, you’ll need to do some research. A great place to start is the government’s Moneysmart website, an education resource providing practical information on all types of investing, as well as tools such as calculators that help you to work out how much wealth you could build over time.

Next it’s important to work out your investment goals, although these will depend on the individual or couple. The goal for some investors will be to save for their retirement or child’s education. Others will want to save for more short-term objectives such as a holiday or a wedding. Or you can aim for a combination of goals.

“Understanding what you are trying to achieve is really important. This will help to determine how much money should be allocated between growth and defensive investments,” says Peter.

Your stage of life will also determine your approach to investing. This includes whether you have or plan on having a family, lifestyle goals such as a desire to travel, how much you earn and how much money you want to have to retire comfortably.

Avoiding common mistakes

Everyone has an opinion on finances and it can be easy to get swept along with what other people are doing – especially if you feel they are successful in their approach.

“There's an old adage,” says Peter. “If your taxi driver tells you what to invest in, you probably should be getting out of investing. It involves a lot more science than just following the herd.”

Peter adds that it’s important to get proper financial advice, rather than simply making decisions based on how your friends or workmates invest. Investing takes discipline and time. Building a relationship with an experienced, qualified financial adviser is a great way to help you set your investment goals, decide what to invest in, and manage and monitor your assets over time.

Another common mistake to avoid is getting emotional about your investments. “If you're either overconfident or anxious about an investment, you probably shouldn't be investing,” he adds. A measured approach goes a long way.

Just do it

Above all, says Peter, the idea is to just get started. “Make a decision and do something about it. You don’t have to invest much, you just need to start. That’s the best way to set you on to a path of financial security. Start small and build up over time. You’re unlikely to get wealthy overnight, but with education, experience and, of course, advice, you'll get there.”

Investing doesn’t need to be daunting – as Peter said, start small if you don’t feel confident at first. But if you take the time to understand the basic concepts, the different types of investments and figure out your goals, you’ll be well on your way to achieving wealth.

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