When it comes to investing, there are some key fundamentals. Think of these basics of investing as a cycle to come back to repeatedly. To be successful investors, we’ll need to:
Think about financial goals, like saving for a car, buying a house or saving for retirement. It helps to ask, ‘What goal will investing help me achieve?’
We can set our investing goals in the short term (1–3 years), medium term (4–9 years) or long term (10 years plus). Writing them down as “I will have $X in X months’ time for X” can help set a target to aim for.
Then we can invest in a way that can help us reach those goals.
We need to do our homework, or get a professional to do it for us. Or both!
There are so many choices to make – such as whether to invest in professionally managed funds such as KiwiSaver or to take more of a DIY (do-it-yourself) direct approach. Then there are the many kinds of investments to choose from, such as bank deposits, bonds, property or shares.
While studying the options for investing, keep in mind that looking at past results is not a reliable way of predicting what the future will bring.
The greater the returns we chase, the more risk we have to be prepared to accept. In the short term, higher-risk investments tend to be more of a roller coaster. Yet over the long term, they can typically come out with better results.
A great place to start is to find out your investor type, which gauges your attitude toward risk and how well you can handle any ups and downs or possible losses. To find out, answer the nine questions in Sorted’s investor kickstarter.
That way you can base your investment decisions on your attitude toward risk.
You need to find a mix of investments (what experts call ‘asset allocation’) to match your investor type. Look at typical mixes of shares, property, bonds and cash for each investor profile in the kickstarter results.
Specific mixes of investments lead to different results, and the investor kickstarter also gives you an idea of what to expect.
A good way to reduce the risks we take is to spread our money within a given kind of investments (what experts call ‘diversifying’). So when investing in shares, for example, instead of buying part of just one company (a ‘share’), we can buy shares in different companies, a variety of industries and even different countries.
While some investments will do badly, others will do well. Spreading investments in this way helps to smooth out the ups and downs in value that happen, and helps protect us from losing money.
Keeping your whole financial situation in mind (for example, paying down your mortgage may get you ahead and improve your net worth faster than investing), starting investing early helps. The longer the timeframe, the more the value of investments can compound upwards and grow.
Regularly adding to investments can greatly improve the results. If you regularly reinvest your returns or constantly drip feed more money into your fund, you will see the highest growth.