How Do I Decide Where and How to Invest?
When planning to build financial abundance, it’s important to explore the deeper reasons behind your desire for wealth.
Perhaps you grew up with very little and now crave financial stability. Maybe you’re aiming to buy your first home. Or perhaps you simply want more money to spend on things you value, like hobbies and travel.
Understanding these intrinsic goals can help guide you as you make bigger decisions on your wealth-building journey.
One of these key decisions is investing.
Investing can seem intimidating, especially when you're starting out and feel inexperienced. But don’t worry — we’re here to help navigate you through the process.
Before anything else, draw upon those deeper reasons you desire abundance and build clear financial goals upon them.
Once you’ve established your investment goals, the next step is to decide what kind of investor you want to be — someone who plays it safe, someone who takes on high risks, or perhaps someone who finds a comfortable balance in between?
Investing always involves some level of risk, and figuring out how much risk you're comfortable with will take time and experience.
Taking on more risk can potentially lead to greater future returns and help you keep up with inflation, but high-risk investments are inherently volatile.
High-risk investments include cryptocurrency, real estate, hedge funds, peer-to-peer lending, private companies, and venture capital investments like angel investing and IPOs.
However, as you begin your investing journey, it’s wise to start with safer, smaller investments and gradually work your way up. Ultimately, the goal should be to build a balanced portfolio with a mix of high- and low-risk investments.
Here are different investment vehicles to consider while starting out, from least risky to more risky —
Savings Accounts and Term Deposits
These two are the safest options as a beginner. Why? Because a savings account will earn you interest as you continue to set money aside into it and gives you the capability to withdraw that money whenever need be. Term deposits lock your money away for a fixed amount of time in exchange for a higher interest rate. Both options offer very modest returns, but your money is safe, ish, depending on your comfortability with the current banking system.
Bonds
Bonds are essentially loans you give to the government or companies in return for interest payments. Government bonds are low-risk and provide steady, though modest, returns.
Superannuation
Your superannuation is a key component of your long-term financial security. Choose a super fund with low fees and a strong performance record. Some funds allow you to select how your super is invested, whether conservatively or in a growth-oriented portfolio. Alternatively, if you set up your own SMSF you have more choice over investments and returns. See our blog on SMSF’s here.
First Home Super Saver Scheme (FHSSS)
If you’re saving for your first home, the FHSSS allows you to make voluntary contributions to your super fund, which can later be withdrawn to help with a house deposit. This can be an immensely beneficial, tax-savvy way to save for your first home.
Micro-Investing Apps
Apps like Raiz and Spaceship let you start investing with just a few dollars to start out. These platforms automatically invest your money in a diversified portfolio of shares and bonds, making it easy to start with small amounts and gradually learn about the stock market.
Mutual Funds
Mutual funds are pooled investment vehicles that allow multiple investors to buy shares in a professionally managed portfolio of stocks, bonds, or other securities. They offer diversification and are designed to meet specific investment goals, such as growth or income. Mutual funds offer something called target-date funds. Target-date funds are a type of mutual fund designed to automatically adjust its asset allocation based on a specific retirement date, becoming more conservative as the target date approaches. It offers a ‘set-it-and-forget-it’ approach to investing.
Managed Funds
Managed funds pool your money with other investors and are managed by professionals who invest in a mix of assets. This is a good option for those who want someone else to manage their investments, but still want exposure to things like shares, property, and bonds.
Mutual funds and managed funds might sound very similar, and they are... While mutual funds are a type of managed fund, managed funds can also include other investment options like hedge funds or private equity, which may offer more customisation and cater to different types of investors.
Exchange-Traded Funds (ETFs)
ETFs are a low-cost way of investing in a wide range of assets — like shares, bonds, or commodities. It’s essentially an investment vehicle that provides built-in diversification. For instance, you can invest in an ETF that tracks the ASX (the top 200 companies in Australia), giving you exposure to the Australian market without needing to pick individual stocks. Popular platforms like CommSec Pocket allow you to start investing in ETFs with as little as $50.
ESG Investments
ESG (Environmental, Social, and Governance) investments focus on companies that prioritise sustainability and ethical practices. These investments aim to promote positive environmental and social impact while potentially reducing long-term risks.
Real Estate Investing
Real estate investing involves purchasing properties, such as residential, commercial, or industrial real estate, with the goal of generating income or capital appreciation. Investors can earn returns through rental income, property value appreciation, or both, while also benefiting from potential tax advantages and portfolio diversification.
Cryptocurrency
Cryptocurrency is a digital/virtual currency secured by cryptography and operates on decentralised networks like blockchain technology. As an investment, you can buy and hold cryptocurrencies hoping their value will rise over time, or trade them actively to profit from price fluctuations, though it's crucial to be aware of their high volatility and risk.
Check out our blog on cryptocurrency here
Individual Stocks (Shares)
Individual stocks represent ownership in a specific company, giving shareholders a claim to a portion of the company’s assets and earnings. When you buy a stock, you are purchasing a small piece of that company, which can fluctuate in value based on the company’s performance and market conditions.
Now that you have a solid understanding of different investment options, let’s introduce the concept of diversification. To succeed in investing, it's crucial to grasp the importance of diversifying your portfolio.
Diversification is when you allocate your investments in a way that doesn’t put all your eggs in one basket. Usually, it involves spreading your money among riskier investments that provide the opportunity for higher return and safer investments that reduce the chance for loss.
So, why exactly is diversification important in investing?
One — Risk Reduction
When you diversify, you spread your investments across different assets, industries, or geographic regions. This reduces the impact of any single investment performing poorly. For instance, if one asset or sector experiences a downturn, the losses might be offset by gains in another, reducing overall risk.
Two — Smoothing Returns
Different assets or sectors perform well under different economic conditions. By holding a diversified portfolio, you increase the likelihood that at least some of your investments will perform well, helping to smooth out returns over time. This can lead to more consistent growth rather than volatile swings in your investment value.
Three — Capital Preservation
It also helps protect your capital from significant losses. By not ‘putting all your eggs in one basket’, you lower the chance of a major loss wiping out your investment. This is especially important in volatile markets or uncertain economic times.
Four — Exposure to Growth Opportunities
Diversifying your investments allows you to take advantage of growth opportunities in different markets or sectors. For instance, while one industry might be in decline, another could be booming. Diversification ensures that you can benefit from various growth opportunities without being overly exposed to a single source of risk.
Five — Psychological Benefits
A well-diversified portfolio can reduce anxiety and stress for investors. Knowing that your investments are spread out and not overly dependent on one asset or sector can make it easier to stay calm during market fluctuations, helping you avoid impulsive decisions that could harm your long-term returns.
How do you diversify your investments?
There's no magic number for asset allocation, but for example, an investor could split their investment to hold 50% stocks and 50% bonds, as bonds tend to be less risky.
Mutual funds, exchange-traded funds (ETFs), and target date funds offer built-in diversification and are worth considering.
Now that you have an overview of the different types of investments, it's time to think about how to approach them. Here are some investment strategies to consider —
Buy and Hold
The buy-and-hold investment strategy means buying investments, like stocks, and keeping them for a long time, even when prices go up and down. The idea is to benefit from the overall growth of your investments over the years, rather than trying to sell and buy based on short-term market changes.
Example: You buy shares of a well-known company like Apple and decide to keep them for ten years. You don’t worry about daily price changes; instead, you hold onto them, hoping their value will increase over the long run as the company grows.
Growth Investing
Growth investing is about buying stocks or other investments from companies that are expected to grow quickly in the future. The goal is to make money as these companies become more valuable over time, even if it means taking on more risk now.
Example: You invest in a startup company that’s developing a new technology. You choose this company because you believe it will become very successful and its stock/share price will rise sharply as it grows, even though it might be more risky.
Value Investing
Value investing is about finding stocks/shares or investments that seem cheaper than they’re actually worth based on their financial performance. The idea is to buy these “bargains” hoping that their true value will be realised over time, which can lead to making money as their price goes up.
Example: You find a well-established company with solid financials, but its stock/share price is currently priced lower than similar companies. You buy the stock because you think it’s a good deal and expect its price to go up as the market realises its true worth.
Passive Investing
This strategy involves buying and holding investments, like index funds or ETFs, that aim to match the performance of a market index rather than trying to beat it. This strategy is about making fewer trades and letting your investments grow steadily over time, often at a lower cost.
Example: You invest in an index fund that tracks the performance of the S&P 500, a major stock market index. Instead of trying to pick individual stocks, you let the fund automatically match the performance of the overall market, making fewer changes to your investments.
Dollar Cost Investing
This investment strategy is where you regularly invest a fixed amount of money into a particular asset, like stocks or mutual funds, regardless of its price. Over time, this approach helps reduce the impact of market ups and downs, as you buy more shares when prices are low and fewer shares when prices are high.
Example: Each month, you invest $100 into a mutual fund, no matter if the market is high or low. Over time, you buy more shares when prices are lower and fewer shares when prices are higher, which helps spread out the risk of market ups and downs.
Now that you’re armed with all of this newfound investing knowledge, you might find yourself inspired to start down this new path of your wealth-building journey as soon as possible.
Here’s how you can embark on your investing journey today —
Leverage your superannuation to boost your retirement savings. Contribute to your superannuation fund and aim to match any employer contributions. Consider making additional personal contributions and consult with your super fund provider/accountant to explore investment options and tax benefits.
Open a brokerage account. Open a brokerage account by choosing a firm that is suitable for you and completing their online application with your personal details and tax file number (TFN). Verify your identity, agree to the firm's terms, and fund your account through a bank transfer or other methods. Once set up, you can start trading and managing your investments. Carefully consider the structure you invest in also, e.g. - a trust has more tax and asset protection benefits.
Talk with a financial advisor to develop a tailored investment plan based on your goals, risk tolerance, and retirement timeline. Michaela and her team at FRE.DM Wealth have extensive experience in investment strategy and are always a phone call away from helping you successfully set out on your investing journey.
Embarking on your investment journey is an exciting step towards achieving financial abundance and reaching your long-term financial goals. With the right strategies and a well-balanced approach, you can build a robust portfolio that aligns with your aspirations and risk tolerance.
If you're ready to take the next step and turn these insights into action, FRE.DM Wealth is here to guide you. Our expert team, led by Michaela, offers tailored advice and comprehensive support to help you navigate your investment path with confidence. Reach out to FRE.DM Wealth to embark on your investment journey towards abundance today.
