Investing explained

Investing is about making sure your money works as hard as you do. The world of investing can be complex and there are many areas you need to understand and many choices you need to make.

Understanding your investment goals

Before investing your money, it's important to understand what it is that you want to achieve. You may want to buy a business, save for your children's education or save for your own retirement. Whatever it is, understanding and documenting your objectives will help you work out what's right for you. Not only that, but it gives you the motivation to stick with it for the long term.

Understanding risk and return

Associated with every investment return is a level of risk. Gaining a good understanding of risk and return will help you choose an investment that suits your investment timeframe as well as your appetite for risk. 

Generally speaking, the higher the potential return, the higher the potential risk. So, when it comes to determining your risk profile, there are two questions you need to ask yourself:

  • 'How comfortable are you with fluctuations in the value of your investment?' If your answer is 'Not comfortable at all', then you may wish to go with a more conservative style investment.
  • 'What is your timeframe for meeting your investment goal?' The longer you have to invest, the more time you have to ride out market volatility.

For more information read our Investment risk and return guide.

Diversification

The concept of diversification is a risk management strategy. Quite simply, it's about 'not putting all your eggs in one basket'.

By spreading (or diversifying) your investments across a number of different asset classes (for example, shares, property, fixed interest and cash), as well as a number of sectors within those asset classes (ie domestic and international shares) and, of course, a number of quality assets within those sectors, you create a well-diversified portfolio which in turn reduces the investment risk. That's because every investment performs differently and negative returns in one area can be offset by positive returns in other areas.

A simple way to invest in an asset class or across a mix of different asset classes is with a managed fund. To find out more about managed funds refer to the section on Why choose a managed fund?

To find out more about investing make an appointment with a Bridges financial planner.