Investing is about putting your savings to work.
There are lots of investment products to choose from. Your choices will depend on whether you want your money to grow or earn interest or both. You also need to think about how long you want to invest for.
You also need to understand how safe or risky various investments are. Do you want to take a chance on making a lot of money but risk making nothing at all? Or would you prefer a safer investment which may not pay as much but promises more security?
However comfortable you are taking risks, you don't want to lose your money or get ripped off. It pays to keep an eye open for investment scams.
Understand the basics and you will be better prepared to ask the experts for advice to help you make good investment choices.
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The bottom line
- Have a plan, know what your goals are.
- Do your research. Shop around.
- Don't fall for investment scams. It doesn't matter how glossy the brochure looks, check it out thoroughly before parting with your money.
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Make a plan
Before you take the plunge into investing, it's a good idea to think about your financial goals. You will be better off if you make a plan rather than rush into a decision. Is your goal to have a deposit on a house in five years? Do you want enough money to help your children when they come to leave home? Or are you aiming to have money to use in your retirement?
Your goals, circumstances and plans are unique. There is a lot to think about when planning and choosing investments. It can pay to get some expert help, at least when you are starting out.
If you are new to investing, you may not feel confident asking for information and getting advice. You can get help finding the right people to talk to and the right questions to ask. See Getting information and advice.
Capital growth or income?
Investments make your money work in two different ways. They can give you capital growth or income. Investments that generate income pay you a regular return for as long as you have the money invested. Investments designed for capital growth don't pay off until you sell them.
Some investments can offer both. For example, if you decide to buy a house or unit which you rent out, you can expect a regular rental income and you may make money on the sale if it goes up in value. Shares are similar. They can pay a regular income from dividends and they can go up in value. There is a risk that they can go down in value, as can property. But this need not stop you from investing in either if you are careful and get independent advice.
The different investment types are called 'asset classes'. The main ones are cash, bonds, property and shares. Each makes your money work in different ways. Each has its own advantages and disadvantages. See More information.
Time - how long to invest for?
You need to decide whether you want to invest for the short-term or the long-term. You need to balance likely returns against ease of access. For example, over time, money invested in buying a house may grow more than money in a high-interest bank deposit account. But if you need money for an emergency, you could probably take money out of the account faster than you could sell the house.
One of the biggest investments that most people make is in their superannuation, and this may build up over many years.
Risk
There are different types of risk. With some investments, the risk is that you might not earn as much as you expect to. This can happen even with ordinary bank accounts if interest rates go down.
Other investments might grow in value over 10 to 15 years but there is risk that they may go backwards a few times in that period.
High risk investments might give the largest returns but there is a chance they will give no returns at all. You might even lose your money!
There are no hard and fast rules for dealing with risk. Some people are comfortable taking risks, others prefer more security.
Investments that offer the highest returns are usually riskier than others. That need not stop you choosing a particular investment. But you should ask what kind of risk you are taking before you make any decisions. See Getting information and advice.
Some scams are dressed up to look like investments, but you should never confuse an investment with a scam. It pays to do your homework and not jump into any investment decisions. If it looks too good to be true, it probably is. If you are being promised higher returns than anything else on the market, be sceptical. If you have been ripped off, get help straight away. See Protecting your money.
Don't put all your eggs in one basket
When you are starting out, you might pick just one or two investments but as your money grows, it can pay to have a number of different ones. The strategy of investing your money in several places is known as diversification.
Picking several different investments can be a good way to manage risk. For example, if you have most of your money in a few secure options, you may be able to afford one or two riskier ones. If they perform well, you benefit. If they don't, you are still likely to earn money on your other investments. And it is unlikely that all your investments will perform badly at the same time, so returns are likely to be more stable from year to year.
Managed funds
If you aren't sure you have the time or expertise to get the best out of your investments, you can invest in a professionally managed investment fund.
Managed funds can be called managed investment schemes, unit trusts, managed trusts or pooled funds. They let you pool your money with other investors in a fund and have it managed on your behalf by investment or fund managers. If you have superannuation, you already invest in a type of managed investment.
There are many types of managed funds available. They can invest in shares, cash, property or fixed interest securities or in a mix of all types of asset. Some take a general approach to investing, others specialise in assets from particular regions or industries.
The type of managed fund you choose will depend on your appetite for risk, the length of your investment and whether or not you wish to receive an income. Fees and charges can vary quite a bit. It pays to shop around. See More information.
Fees, charges and tax
You may have shopped around when choosing your basic savings account to find the best deal on fees and charges. It is important to be just as careful when researching other investments. There will be costs to pay, and they are not always obvious.
For example:
- If you are going to buy a house as an investment, you may need to think about stamp duty and other government charges, agent's commissions, the cost of borrowing money, repairs and maintenance to the property, and capital gains tax when you sell.
- If you are going to buy shares, you may need to think about broker's fees, income tax on the dividends and capital gains tax when you sell.
- If you invest in a managed fund, you may need to think about annual management fees, other charges such as entry and exit fees, and capital gains or income tax depending on the type of fund.
- If you are going to put your savings into a high-interest deposit account, you may need to think about bank fees and charges and income tax.
You will need to pay tax on your investment returns. If your investments earn interest, you may need to pay income tax. If your investments give capital growth, you may need to pay capital gains tax when you sell them. It can help to get expert advice to make sure you pay the right amount of tax. See Getting information and advice.
More information
There's a lot more that you can find out about investing. See More information.