How to choose your investments – this is the final post in the getting started with investing series. Feeling a little more confident??
Given this is the final piece of the puzzle – here’s a quick recap of what we’ve covered so far:
Step1: Write out your investment goals. Clarify WHY you are investing and identify your motivation for sticking with it.
Step 2: Determine your investment time horizon – by when will you need access to your funds to meet your investment goals (e.g. 2 years, 5 years, 15 years)
Step 3: Determine how comfortable are you with taking investment risk? Are you an aggressive investor, a balanced investor or perhaps a conservative investor and what all that means for expected investment returns.
Step 4: Look at what asset allocation are you best suited to based on your investment time frame and risk profile.
Step 5: Know the difference between active and passively management investments & what mix suits you & your goals.
All that’s left to do is look at the decision making that goes into specifically what investments you should choose.
Now obviously I can’t tell you what you should invest in – because that’s personal advice. But what I can do, is give you a decision making framework for working out what might suit you best.
First thing’s first – you need to know & understand what you have to choose from.
Now, there are a number of alternative investment products like warrants, options, futures and swaps to name a few.
These investment products are traded by sophisticated investors, hedge funds and institutions with very specific intentions.
They are complicated and generally speaking not the investment choice of mums and dads who are starting out with investing.
Here’s a brief explanation of the following core investment types:
- Shares: you own a unit of direct ownership interest in a company listed on the ASX
- Bonds: your money is lent to a company (corporate bonds) or government (government bonds) for a defined period of time at a variable or fixed interest rate.
- Managed funds: you own units in a fund and that fund invests in investments. You don’t own the investments directly.
- ETF’s: an exchange traded fund is traded on the stock exchange. It tracks an index (like ASX200 for example) and you own units or shares in the ETF’s itself.
For a more detailed explanation – I would recommend the ASX’s online courses which provide video content (quick and easy to digest) to explain each of the investment types above.
So here’s my checklist for deciding exactly what to invest in:
- Familiarize yourself with Morningstar research: they are a fantastic resource with both free and paid subscriptions that will allow you to research and compare investment options under different investment types. They have a rating system which uses stars (from one to five stars) and a recommendation ranking.
Using their research for comparing investments is a great way to learn about what they take into consideration (and you should too) when valuing or ranking an investment product against another.
- Consider your choices in light of your investment timeframe: If you have a 5 year plus timeframe for investing then you can consider riskier investments. If you have financial goals that require access to funds in less than 5 years, then you should consider investment types that have less risk.
- Consider your choices in light of your individual risk profile: If you are choosing a managed fund for example, make sure their asset allocation matches your risk profile e.g. balanced if you are moderate risk investor.
- Consider the ongoing costs: fees associated with ETF’s and managed fees can make a huge difference to your net return over time. If you are choosing direct shares as an investment you will need to factor in the brokerage & any other transaction costs you will incur and how these differ between various brokers when deciding on a brokerage account. Make sure you weigh into the equation the individual costs of each of the investments you choose.
- Consider subscribing to an independent research company: who can provide you with ongoing research and support. They will not only provide you with specific research in relation to your investments but also ongoing investment education to improve your knowledge and confidence overall.
There are over 12,000 managed funds in Australia and around 2100 listed companies on the ASX.
This should hopefully give you a starting point for the decisions that go into getting started with investing.
Your next step
If you do nothing else from reading this series – visit Morningstar research and sign up for their weekly newsletter.
You will get a weekly newsletter with articles on investing on a variety a different topics that will start you on a path of further education.
In particular, their media centre which has useful little videos providing snippets of investment discussion on all different asset classes from industry professionals.
They explain investing concepts, products, returns, economics and more in under 10 or so minutes – like this one which talks about dollar cost averaging.
I hope you’ve enjoyed this series!