Investing: As Easy As 1-2-3
The best way to learn about investing is to put aside a bit of money and simply try it, says financial adviser Martin Hawes. He explains how to get started.
19 October 2021
Starting out in investing isn’t easy. It requires a leap of faith. You can learn about investment in books, articles and seminars, but ultimately you have to take a deep breath, put your hand in your pocket and give your money to someone else when you buy an investment. That’s risky and uncomfortable, but to really understand investing, that’s what you have to do. You learn by doing. My advice would be to start small, so any losses are not great – and be patient.
1. There are only four real investments
Investment seems very complicated, with many possibilities and opportunities competing for your money. But when you look at its essence, there are only four real investment types: Shares Property Bonds, also known as fixed interest Cash, which is a bank savings account or term deposits Are you surprised there are only four?
Everything else you might call an ‘investment’ is either a vehicle to make investments, like a syndicate or a managed fund, or something that you can speculate on, like gold or cryptocurrencies. There’s a big difference between ‘investments’ and ‘speculation’. An investor buys company shares for a part of any profits, buys property for the rent, or expects interest payments from bonds and bank interest. There may be a capital gain, but mainly you expect investments to give you a cash return.
Managed funds of various sorts, say, managed investment schemes, KiwiSaver, and property syndicates, are also investments, because they’re simply a means of investing. They’re very useful for people who lack the expertise to invest directly themselves, or who only have a small amount of money and can’t get spread their risk (diversify) by investing directly with that small amount. Speculators can only make money by guessing the future value of what they’re buying, like a gold bar. With speculating, you only make money if you sell your gold bar for more than you paid for it.
2. Asset allocation
The way you mix your money among those four investments is critical. It’s called ‘asset allocation’ and simply means the proportion of your money that’s in each of the asset classes – in each of shares, property, bonds, and cash. The proportion that you have in each of these will, more than anything else, dictate the returns you may get and the volatility (the ups and downs) you’ll experience.
Investing in shares might give you lots of ups, and potentially a higher return over time, but you’ll experience a good few downs in getting those returns. Shares are the riskiest type of investment, and recommended for investors putting their money in for 10 years or more.
Before you start investing, make sure any investment aligns with your risk level. A financial adviser can help you with this. Finding out your risk level means working out how long you’ll have you money invested for (short term or long term), your goals, your financial situation, and how comfortable you are with investing. Once you’ve found out the risk appetite you have, find investments that match it, and think hard before moving from it. Make up a diversified investment portfolio that suits your personal situation with the help of an adviser.
3. Choosing your investments
When you’ve set up your asset allocation, and worked out what investments suit your risk profile, you’ll have to select individual investments. This means you’ll have to decide whether you’ll own shares in Contact Energy or Ryman Healthcare, in The Warehouse or Michael Hill, for example.
Many new investors decide they’re simply not up for making these selections and instead opt to invest via managed funds. They effectively pay a fee to a professional to make these decisions for them. When thinking about investment selection, get your head around the idea that value is largely driven by income. The more income an investment gets, the more it goes up in value. For example, if a company can grow its profits, the share price will similarly grow (all else being equal). Good investors analyse likely profit growth more than anything else.
1-2-3. Is it really that simple?
These three things all seem easy enough when they’re down on paper. However, when you’re in the hurly-burly of investment markets and trying to make sensible decisions, things never seem simple. Even the surest of investors can get confused by media commentators and others with competing views, often speaking from a platform of vested interest. You’ll learn best by doing. It’s experience that allows you to blank out the noise of the markets and find some quiet space to work out what’s important.
Ultimately, that means being sure that your asset allocation is right, mostly making sure you do not push out risk by buying too much of shares and property. It also means avoiding speculating on things like gold or cryptocurrencies – they may be packaged as investments, but they’re not. Be wary of buying a lot of early-stage investments that have no income: the promoters may promise a lot at some time in the future, but until then, you’ll have a risky investment.
Published 25 February 2020
Martin Hawes is the Chair of the Summer Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr Investment Management Ltd and a Product Disclosure statement is available on request. Martin is an Authorised Financial Adviser and a Disclosure Statements is available on request and free of charge at www.martinhawes.com. This statement is general in nature and not personalised advice.
This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.
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