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When it comes to investing, often the most challenging part is knowing how and when to get started.

There are so many choices of investments and platforms; it can be easy to get stuck in the search for the perfect answer and timing.

The truth is the perfect time for you to invest is as soon as you and your finances are ready. Use the five questions below as a guide to tell if you should get started investing.

  1. Do you spend less than you earn, every payday?
  2. Have you paid off all of your debts (except your car, mortgage and HECS)?
  3. Do you have an emergency stash of at least three month’s spending?
  4. Do you have some cash you don’t plan on spending in the next three or so years?
  5. Have you considered whether you are best to use your surplus to reduce your home loan, contribute to super or to invest? Learn more here.

If you answered yes to each question, investing could be the right move for you. Starting your investing journey can be intimidating—we get it. Between figuring out your asset allocation, finding the right investment platform and deciding how much risk you can actually stomach, it’s easy to feel overwhelmed. But we can help take the complexity out of it. That’s why we created this quick guide to getting started investing, to help you grasp a better understanding of how you can maximise your time and money. 

What is investing?

Put simply, investing is the process of putting your savings to work to create more assets or income or a combination of both.

First, set a goal

Work out why you are investing. Maybe you are saving to buy your first home or investment property or perhaps to pay for your kid’s school fees. In most cases, you will have an amount in mind and a date when you’ll need it.

There are only three levers you can pull to achieve your goal: the amount you invest, how long you invest for and the return you earn (net of fees). You can choose any two, which will fix the third. And of course, not all combinations are feasible. For example, higher returns and shorter periods will lead to higher income while lower returns and longer periods will lead to lower income. At this stage, how much you invest will have the largest impact, and your goal will help you create your plan and stick to it.

What should you invest in?

Investing in the right mix of assets is the key to achieving your goals. In fact, asset allocation accounts for 90% of the expected return over time. 

Generally, you can invest in five different asset classes. I call these the 5 B’s of investing. The first two B’s are Bricks (or buildings) and Businesses. They’re both capable of delivering high returns over the long term, although this varies significantly in the short term and so we call them growth assets. The next three B’s are Bullion, Bonds and Bills. These assets are more likely to generate lower but steadier returns so we call them defensive assets.

So how do you decide what the right asset allocation is for you?

In order to aim for a higher return, you need to allocate more of your investment to Growth assets and less to defensive assets.

So, you need to allocate enough to growth assets to deliver the return you need and enough to defensive assets so you can sleep at night and avoid panic reactions when the market falls.

Read more about asset allocation here.

Managing your behaviour

In the words of Benjamin Graham author of the Intelligent Investor, "The investor's chief problem — and even his worst enemy — is likely to be himself." 

If asset allocation is the gateway to better returns, then your behaviour is the key to actually achieving the expected returns.

So, your response to risk and your ability to bear it matter. A lot. We call this your Risk Profile. Your risk profile comes from a combination of innate psychological traits, experience, and education. Your risk capacity is a function of your time horizon and the availability of a plan B.

Risk profiles are usually labelled High Growth, Growth, Balanced, and conservative in descending order of ability and willingness to accept and tolerate risk. These names vary widely between fund managers, so double check the asset allocation before investing.

You can start small

If you’ve got more than $5,000 then get some professional advice before investing.

If you are starting with less, use this as an opportunity to learn about yourself.

The most valuable lesson you can learn at this stage is how you react when your investments go up or down. If they go up, do you think you’re the next Warren Buffet? Or do you just get a warm feeling inside? If they go down, do you feel like selling and hiding under the doona? Or do you feel like buying more?

These insights into your reactions to volatility will put you in good stead when you’re ready to get serious.

With a small sum, the best place to get this experience is one of the micro-investing platforms, such as Raiz or Spaceship, that offer diversified investments with a range of risk/return profiles.

Alternatively, consider one of the low-cost share trading sites such as Pearler, Sharesies, or Commsec who offer the ability to buy fractions of shares or ETFs enabling you to get started with small sums.

Don’t get too obsessed with returns, fees or structure at this point. The important thing is to get started, gather a pool large enough to get serious and learn some valuable personal lessons.

Psssst… If you’re ready to invest a $5,000 minimum investment, you might want to try Life Sherpa | Invest, where all you have to do is choose a portfolio, then leave all the hard work to us.

Have a plan

The most significant impact you can have on growing your investment is how much you invest, so have a plan to add some more. If you automate this, it will make it easier and avoid having to decide what day to invest. Raiz makes this easy with their cool roundup feature.

When you’re ready to get serious

Once you’ve built up a decent pool, say $5,000, it’s time to get some advice. Book a discovery call with your Sherpa.

Your adviser will help you build a long term investment plan based on your circumstances, goals, risk profile and time horizon. They will also provide accountability, and will improve your likelihood of sticking to the plan and achieving your goal.

Your plan will include the right asset allocation to maximise returns for the level of risk that you need and can tolerate. It will also recommend the best way to implement that allocation and the right product for your needs, taking into account fees, performance and taxation.

Vince Scully

Founder and Chief Sherpa

With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Vince founded the Calliva Group; a fund manager, product issuer, advisor and lender to Government and private clients. Vince is an advisor to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie bank’s infrastructure team.

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