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Spending – The Golden Rules Of Investing

Greg Medcraft
16th May, 2015

Smart investors don’t rush; they prepare, plan and then monitor their investments.

Plan ahead

If you have a financial goal in mind, it will be easier to develop an appropriate investment plan. Think about what you want and why, and set a timeframe to achieve each goal. Then you can measure all investments against your plan.

Make sure you’re ready to invest by checking you have:

  • your debts under control
  • enough cash for emergencies (a good rule of thumb is to have easy access to 3 months’ worth of household expenses)
  • adequate insurance cover.

Risk and return

While your goals are important, you should also consider your appetite for risk. Successful investors understand the types of risks that can affect their investments and what they need to look out for.

Diversification

A good way of managing risk is to spread your money between different asset classes such as cash, fixed interest, property and shares. This will leave you less exposed to a single economic event, so if one business or sector you’ve invested in does badly, you won’t lose all your money.

Judging returns

To help you work out whether the returns being offered are reasonable, look at the expected returns for other similar products. If the returns seem high in comparison, be very wary.

Know the investment

Before you jump in, carefully assess the investment’s suitability. Read the product disclosure statement and make sure you understand the product’s key features, fees, commissions, benefits and risks. Ask the product provider or a financial adviser if you need further clarification.

Protect your capital

If protecting your capital is important, then you need to find out where you stand if something goes wrong with the investment. Words like ‘safe’ and ‘guaranteed’ mean nothing if the investment fails, and the fine print says you’ll be the last on the list of creditors.

Accessing your money

Check to see if there will be any penalties to get your money back before the end of the investment period. If flexibility is important, think about investing in another financial product that allows you to access your money when you need it.

Know what your money is being used for

If you know what your money will be used for, you’ll be better placed to decide how risky the investment is and whether you’re comfortable putting your money into it. If you’re investing in a company, find out what the company does, how long they’ve been in business, and how successful they’ve been with similar projects in the past.

Monitor the investment

It’s important to keep track of your investments – but a panicked reaction to changing market conditions can often make things worse. Some investors try to time the market and fail. If your strategy is sound, and the investment is long-term, stay with it.

Make sure you’re clear about why you’re investing and only invest in products you understand.

Visit moneysmart.gov.au to find out how to develop an investing plan that meets your needs.

Greg Medcraft
Chairman
Australian Securities and Investments Commission

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