This article is taken from Issue 4 of our magazine. Part 1 of this series is available in Issue 3. Issues 1, 2 and 3 are also available through the App store and Google Play store. Please subscribe to the Great Health Guide magazine – (subscription FREE for limited time only)
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Women & Investing : The Basics of Investing written by Bill Dodd
This is the second article in a series on investing, particularly for women. As pointed out in the first article (in Issue 3), over past generations few women took an interest in financial matters which were left largely to the man. This has had to change for a number of reasons and although all Australians need to become smarter with their money, women face some unique issues when it comes to handling money and investing.
Before we start to consider investment there are some basic points to consider.
The first step to investing is saving. It is important to save at least 10% of your income and invest this in a secure place with a return above the inflation rate. Above all, avoid credit card debt by paying the entire balance in full. Credit card debt deprives so many Australians of the opportunity to accumulate wealth.
Investing requires patience and it is important to start investing early and invest regularly to take advantage of the power of compound interest. The following graph provides an example of the effect of compounding interest. In this example, a simple strategy of investing $50 every month at an annual return of 10%, grows to about $110,000 over a 30 year period. Note the important role of compounding in this example because the investor has only contributed $18,000 of the $110,000 which has accumulated over the 30 year period.
The aspects of investment that you need to understand
1. Decide on your investment objectives
Why are you investing? Are you investing to buy a home or for retirement? How much will you invest on a regular basis? How much will you need for a comfortable retirement? Will this be part of your superannuation plan?
2. Understand the risks
Risk takes many forms. The main ones are:
Market risk – the risk that the market will fall and most shares will fall in value too.
Specific risk – sometimes referred to as business risk. This is the risk that a specific security that you invest in, will fail due to problems such as bankruptcy.
Inflation risk-inflation is the loss of purchasing power. This is a problem for all investors and particularly for retirees who are depending on returns from investments.
3. Understand the investment alternatives. The major asset classes are:
Property – this can be direct investment or through a property trust
Equity – by buying shares you become a shareholder in a business
Cash – this could be in a bank account or a cash management account
Debt – debt securities include bonds and mortgage based securities
Investments should be diversified to include several of the above asset classes. Over the long term, shares have outperformed other asset classes. Shares are an attractive investment because they are very liquid, which means that you can readily sell them. This is important because while it may take three or more months to complete the sale of property, shares can be sold on the market immediately and the funds are transferred to the investor’s account in three days. Shares also offer the opportunity to diversify investments over very different businesses and into international markets.
4. What returns can you expect?
Investors are often unrealistic about the returns that investments will yield. When investing in the share market investors need to realise that the long term (more than 40 years) return on the market is about 12%. In reality if an investor can maintain a return of 10% over the long term, this is well above average. In the current investment climate with bank interest rates at record lows of 2%, the returns are likely to be significantly lower than the long term average.
5. It is important to diversify
Risks can be lowered with diversification and this is an important part of the investment strategy. A planned investment approach would usually include investments from several of the asset classes.
6. Have a written plan
Once your objectives are clear, you must have a plan and it must be a written plan. Most investors do not have a written plan which explains in part why so many investors have such poor returns.
7. Monitor the investment
Always remember that no one will look after your money better than you will. Even if you have a great financial advisor it is essential to monitor the progress of all investments on at least a monthly basis. This is conveniently done using an MS Excel spreadsheet or you could use a notebook. The performance of your portfolio should be compared to a suitable benchmark and the ASX200 index provides a very useful reference point for investors. Monitoring the investment really takes little time and if you do it conscientiously then you will know exactly how your investment is performing. Furthermore you will have the information to enable you to avoid the problems of the bear market of 2008 when so many investors lost half of their investment capital simply because they failed to monitor their investments.
8. Understand what your finance professional can and will provide
The financial services industry in Australia has generally not served investors well. Despite the high fees, very few fund managers are able to consistently outperform the share index in the long term. You need to be aware that many well credentialed professionals may have a poor record of investment performance and should be avoided.
This means that all investors need to protect themselves by having some understanding of the investment process, how it works, where to get advice and where to turn to if there are difficulties.
9. Understand where you can get investment advice
The advice given by professionals such as financial advisers and brokers may not always be in the best interest of the investor. It is important to find an advisor that you have confidence in, who is competent and understands your investment needs. There are a number of useful websites providing investment information, including the ASIC website. Not for profit organisations such as the Australian Shareholders’ Association and the Australian Investors’ Association serve Australian investors and provide a wealth of information and some investment education.
10. Investment courses
There are many courses offered on investment. While some are very useful, they are often very expensive. A useful starting point would be the excellent online courses available at the education centre of the Australian Securities Exchange at no charge. I have offered a series of courses in investing in the share market in all Australian states over the past few years for Investment Associations. The 10 module video series of that course is now available free to members of the Australian Shareholders Association.
This article has provided a brief overview of investing. The remaining four parts to this series will deal mainly with investing in the share market. A more detailed introduction to investing particularly in the share market can be can be obtained from my website.
Author of this article:
Bill Dodd is a retired academic with a long experience in investing. His concern at the lack of financial literacy in Australia prompted him to become active in investment education. Since 2009 he has given courses on investing for the Australian Shareholders’ Association and the Australian Investors’ Association in all states. His website provides investor information and his 10 session video course on investing is available on the Australian Shareholders Association website and at no cost to members.
