Most people want to get started in some form of investment, building wealth for the future - but aren't sure where to start or what to consider. Below are 6 key things to look at, when assessing an investment.
1. What is the Goal or Purpose of the investment?
Your investment should always have a goal or purpose in mind. The goal enables you to consider which investment is right for you – and check back to see if there is a way to achieve the goal with less risk!
You should consider your short, medium and longer-term goals – all of which may have different investments that are appropriate.
2. How much risk are you comfortable taking on?
The risk you are comfortable with often comes back to what you understand, as well as what you have to lose.
Studies show that we feel the impact of losses 2 to 2.5x more than we do gains – that means the equivalent negative feeling for a 25% return, is just a 10% loss!
Judging what you are comfortable with can be quite difficult – however ASIC’s MoneySmart website has several great tools to both educate and give you an idea of your risk profile.
A good way to assess this quickly, however, is to ask yourself if you could still achieve this goal with less risk.
For example, you may be saving for a holiday which is 6 months away but are comfortable in putting the money into shares. If you could still meet your goal by simply putting it in the bank, why take on the additional risk?
3. What are the costs involved in the investment – and are you actually making any money?
This is often something not considered but is extremely important.
There are often Initial costs which may include advice fees, stamp duty and entry fees. These shrink the amount of money you had to invest from the very beginning, starting you at a loss! The important consideration here is how long it takes for you to make those costs back.
Ongoing costs can eat into your returns over the long term and are often not noticed. These can include ongoing advice fees, accounting fees, Investment costs, or property costs. The biggest cost I regularly see people not consider is Interest on their loans. When you borrow money to invest, the interest should be taken into account as part of your overall return. An investment that returned 8%, but that cost you 6% in interest only generated 2% return.
Costs are not a bad thing – often they are a necessary factor in meeting your investment goals – it is just important you take them into consideration.
4. What are the Tax implications?
Another major consideration is the effect that tax may have on your investment. Much like costs, tax eats into your returns, diminishing the reward for your investment.
Different tax environments such as super or insurance bonds can offer great value in this regard but can also be quite restrictive and may not suit your goals.
A common mistake I see with regards to tax, however, is where investors focus on tax minimisation to the detriment of their own returns. Ultimately, if you’re paying tax, you’re making money!
5. Are you adequately diversified?
Everyone knows the saying “don’t put all your eggs in one basket” – but this is something a lot of investors do poorly.
Diversification is when you spread your risk over a range of investments. This could be spreading your money across different assets such as shares, property and bonds – different sectors or companies for shares, or states for property.
The advantage of diversifying is that if one of your investments is not doing well, all of your money is not tied into it.
6. If it sounds too good to be true, it probably is.
Investments should never be for a ‘quick buck’ and you should be wary of any ideas that sell themselves as get rich quick schemes.
Often, we get caught up in the excitement, as well as the pictures of yachts and fast cars, however, investment is long term and strategic, not short term and speculative.
Hopefully these considerations help you in deciding whether an investment is for you.
Remember that smart investors don’t rush, they invest for the long term and are clear in their goals and reasons for investment.
If you want to talk further about investing, please get in touch!
Any information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.