There's a lot to get your head around when you're just getting started with investing.
Regardless of what you're investing in, be it shares, property or fixed interest, there are a few key principles worth remembering as you start investing.
Below are our top tips on how to begin investing, wherever you're starting from.
Key takeaways
- Diversify your money across, and within, different asset classes to reduce risk.
- Understand the level of risk carried by any investment before committing your money.
- Higher risk doesn't always mean higher return, and lower risk investments can still generate solid, long-term returns.
- Keep a long-term mindset and avoid reacting emotionally to short-term market movements.
- Review your diversification and risk settings regularly, in good markets as well as difficult ones.
Why is diversification important?
You might have heard the saying, don't put all your eggs in one basket.
This certainly holds true. You should always spread your funds across different asset classes and sectors, such as shares, property, fixed interest and cash.
Diversifying spreads your risk out, so the ups and downs of each different investment balance out, and the value of your total portfolio doesn't change dramatically day to day.
You can think of diversification in terms of asset class, as discussed above, or more specifically within each asset class.
For shares, this might mean investing in companies across different sectors, such as healthcare, retail or industrials. For property, it might mean holding different types of property, such as residential and commercial.
Diversification is our first and foremost tip. You should always consider your level of diversification and look to monitor it in the good times, as well as the not so good times.
Understanding the Risk Scale
Investments in different asset classes carry different levels of risk. You should always know what you're putting your money into, and what level of risk that investment carries with it.
We try to know as much as possible about an investment and carefully analyse the risk and return relationship before taking any action. We encourage our clients to do the same.
If you don't know what you're investing in, that means you also don't know the risks involved.
Generally speaking, a higher degree of risk comes with the potential for a higher return, and vice versa.
That said, higher risk investments don't always lead to higher returns, because the risk can become too great. Lower risk investments have also been shown to generate good, solid, long-term returns.
Shares and property are normally considered higher on the risk scale than the likes of cash and term deposits.
Thinking Long Term
Investment markets have their ups and downs. It's important to keep a level head and remember you're in this for the long game.
If you want to generate long-term success from investing, you need to keep a long-term mindset. Try to mostly ignore the day to day movements of the market, and focus instead on long-term themes and investment ideas.
We often see that investors who react to market news, and have knee-jerk reactions to current affairs, end up making irrational investment decisions and forget why they were invested in the first place.
As such, it's crucial to keep a long-term view in focus at all times.
What to do next
Getting started with investing doesn't have to be overwhelming. Diversifying sensibly, understanding risk and keeping a long-term mindset are the foundations to build on.
Contact your local Morgans office today to arrange a consultation and start building a portfolio that's right for you.
Frequently asked questions
How much money do I need to start investing?
There's no fixed minimum. What matters more than the starting amount is diversifying appropriately and investing with a long-term mindset, in line with your own tolerance for risk.
What's the difference between shares, property and fixed interest?
Shares give you part ownership in a company. Property involves investing in residential or commercial real estate. Fixed interest generally involves lending money to a government or company in return for interest payments. Each carries a different level of risk and return.
How do I know my tolerance for risk?
This comes down to understanding the risk carried by each asset class, and being honest about how comfortable you are with the ups and downs that come with it. Speaking with a financial adviser can help you assess this properly.
Why shouldn't I react to short-term market news?
Reacting to short-term news often leads to irrational, emotional decisions that work against your original investment goals. Keeping a long-term mindset helps you stay focused on the bigger picture.
