Investment Basics

Understanding the investment basics

Whatever your financial goals, investing can be a great way to help you achieve them sooner. But where do you start? And what types of investments are right for you?

What are you trying to achieve?

If you’re thinking of investing, the first thing you need to do is work out what your personal and financial goals are.

Identifying the things in life that are important to you – like owning a house, starting a family or having enough for the kids’ education – will help you work out the lifestyle you want, and the amount of money you’ll need to achieve it.

Understanding your goals will give you the basis for developing your investment or financial plan.

How much do I need to invest?

No matter how little you have, you can start investing for the future. The longer your investment has to grow, the better the results. Even if you can’t afford to invest a large amount, you may be able to start a small but regular savings plan.

Why is a budget important?

The simple truth is that the only money you’re likely to save and invest is the money you don’t spend. But many people only have a vague idea of how much they actually spend.

With a budget, you can see exactly where your money goes and how it’s being used. This allows you to:

• identify surplus money that can be used for investing
• see where your money is being spent, and help you decide whether to continue spending money in the same way, or reduce your outgoings and increase your savings
• cope with surprise expenses
• manage your finances, and give you more confidence in your financial future.

What are asset classes?

Asset classes refer to different types of investments. There are four main asset classes you can invest in – cash, fixed interest, property and shares. The return you achieve, and the level of risk, is different with each asset class.

Cash

Cash is the generic term for investments such as short-term bank deposits and treasury notes. Cash is considered the least risky of the major asset classes – generally providing investors with a moderate regular income, but little chance of capital gain.

Fixed interest

Fixed interest investments, or bonds, are effectively loans provided by investors to corporations and government bodies in return for interest payments over the life of the bond. Bonds carry a low to medium risk, and predominantly reward investors with a regular income stream – generally higher than that earned by cash investments.

Property

Property is considered a growth asset, and involves investing in residential or commercial property, or via a listed property trust (LPT). LPTs invest in a range of property – including residential housing, shopping centres, office buildings, factories, and hotels. As property is a growth investment, capital gains may be expected over the long term, in addition to ongoing income from rent. Property is considered moderately volatile.

Shares

Shares are securities representing ownership of a company. When you buy a share in a company, you become a joint owner of the business. As a shareholder, you may enjoy the company’s profits through dividends. You can also sell the shares, hopefully for a capital gain, sometime in the future. Shares are the most volatile of the major asset classes in the short term, but can outperform other asset classes over the longer term.

Investing in different asset classes is a good way to reduce risk. By spreading your funds across different asset classes you remove the risk of putting all your eggs in one basket – i.e. the risk that you will choose the wrong asset class at the wrong time.