Investing For Beginners: Everything You Need To Know (2024)

The two key ways to make money from investments are selling an asset for more than you paid for it (a.k.a. capital gains), or earning yield, such as through dividends, interest or rental income.

Examples of some investment strategies used to achieve these ends include:

• ‘Timing’ buys to when market prices fall, with the aim of selling when prices rise again.
• Picking low-cost/undervalued assets you believe have the potential to make significant gains.
• Choosing quality or broad-market assets expected to grow steadily in value over many years.
• Buying and holding fixed interest assets long-term to earn guaranteed returns at maturity.

The range of physical and financial assets you can invest in are also broadly categorised as either ‘growth’ or ‘defensive’ assets. For instance:

• Stocks are a growth asset with a moderate-high level of risk due to market volatility; and
• A term depositthat earns you interest while protecting your cash is a low-risk defensive asset.

All investments carry some risk, but risk levels vary across different strategies and asset types. Lower levels of risk are usually associated with lower returns, and vice versa.

What return are you aiming to achieve from your investments and why? If you can’t answer that question, you’ll struggle to make decisions about how and where to invest.

Adviser Jessica Brady said setting financial goals helps you:

• Know your investments are worth the trade-off of energy and resources required.
• Remain committed when you’re feeling financially pinched or markets are down.

“We know that the more you’re able to connect yourself to that future goal and really consider ‘what would life look like if you achieved that goal?’, at a subliminal or subconscious level your body and your brain is actually helping you make decisions that enable you to reach that goal.”

Brady suggests beginners break their goals into three different time horizons: the next 12 months; the next five years; and long-term goals. For longer-term goals she encourages people to visualise the lifestyle they want, such as being mortgage-free or moving to part-time work by a certain age.

“Building that sort of vision of your life then enables you to start putting down okay, well, how much mortgage would I need to have paid off, or what does a holiday currently cost, or how much replacement income would I need if I paid off a mortgage but still wanted to maintain my lifestyle?—and then it becomes a little bit easier to start quantifying what that number looks like.”

With prioritised goals in place, Brady said it was easier to determine how much of the money you have available to invest should be allocated to achieving goals on each time horizon and the strategies you’ll use, including how much risk you’re willing to take.

“Normally, the very general rule of thumb is if it’s a shorter time horizon, so let’s say next 12 or 24 months, we’re typically quite conservative in how we would deploy those funds,” she said.

“When we talk about medium to longer term goals, if we’ve got more time to ride out market fluctuations and more volatility that innately exists when you’re investing. Then we can accept more risk along the way because we’ve got more time for it to come back—and we can actually buy at lower rates, which can help us expedite that growth.”

Brady said long-term strategies typically involved aiming for growth of the underlying asset—such as a rise in share prices or increase in property value. However, income may be a higher priority for some, resulting in them seeking assets with a good distribution history.

“As an example, they might buy an investment property in an area where there hasn’t been as large growth but they know that the yield that they get is higher than other areas.”

It’s also important to remember that every time you buy or sell an asset, you’re creating a position—either a capital gain or a capital loss—that will affect how much tax you pay, Brady told ForbesAdvisor.

“And so, if we make money, we’ve got a capital gain. That’s exciting. If you hold the asset for more than 12 months, there’s a 50% discount (on capital gains tax owed).

“That becomes really relevant in making sure that you’re not considering really short term strategies, because you may not realise that there’s quite a significant tax implication for doing that.”

“Or there’s a capital loss, so you sell for lower than what you purchased for, and that may be used to offset other gains.”

The most common types of assets Australians invest in include:

• Australian company shares
• International company shares
• Residential property
• Term deposits
• Exchange-traded funds (ETFs)

Just like a diverse natural ecosystem, Brady said investment portfolios should also be diverse to thrive. Diversification across multiple asset types creates opportunity, “because if one doesn’t grow as well, then we have others to fall back on, and we can reduce risk there”.

Normally, the very general rule of thumb is if it’s a shorter time horizon, so let’s say next 12 or 24 months, we’re typically quite conservative in how we would deploy those funds

As well as diverse asset classes, Brady suggests diversifying across geographies (e.g., global stocks), and industry sectors. She said diversified portfolios offered via ETFs and managed fundscan reduce effort for inexperienced investors.

“I typically say, especially for new investors, picking stocks yourself is extremely labour-intensive, and it requires an enormous amount of due diligence. Most people don’t have the time nor inclination to do that,” Brady notes.

“And so then they will look at portfolios that are sort of pre-built that they can deploy their money to—that they know, every time I invest in this ETF or managed fund or whatever it is, I’m getting a really broad spectrum of companies that I’m invested in to reduce risk and make sure that I’m well diversified.”

Brady warns you should take time to “lift the lid” on any investment product so you know what assets are included, the weighting to growth or defensive assets, and its potential for returns within your time horizon.

“You also want to make sure that anything that you’re invested in aligns to your personal beliefs and values and make sure that you’re investing in companies that you want it to be invested in.”

Low-to-moderate risk investment types to explore

• Broad-market index ETFs and managed funds
• Term deposits
• Australian Government bonds

High-risk investment types not for the inexperienced

• Cryptocurrency
• Futures and options contracts
• Contracts for Difference (CFDs)

How much you can afford to invest will depend on your income, budget and risk tolerance—that is, how much you’re willing to possibly lose. Some people invest lump sums at various intervals, while others benefit from treating it like a savings habit. Focusing on consistency rather than being concerned about when to buy (e.g., trying to time the market) can also reduce complexity.

Jess Brady said dollar-cost-averaging (DCA)—a strategy where you invest regularly regardless of market prices, so that costs average out—helps people establish a good habit. She encourages setting up a regular, automated deposit into your investment account.

“I really like automations when it comes to setting up our financial world. We’re so busy in our lives—to have to manually remember to invest creates a human error potential,” Brady says.

“But it also creates that fear potential as well, because every single time you go to manually buy, in the back of your brain you might be thinking ‘is this the right time?’”

She said to choose a cadence that works for you and is cost-effective: “Check the fees and do the math and figure out what is going to make the most financial sense because you don’t want that amount to be eroded in fees.”

Brady said you can also use the averaging principle to gradually take profits, so you don’t have to pick the perfect day to sell to get a price you’re happy with.

As you get closer to achieving a financial goal, you should revisit the make-up of your portfolio, Brady advises.

“We want to make sure that we are taking steps to understand if we’re now overweighted in a particular type of asset or, you know, a portfolio might now be too aggressive because we don’t have very long until we want to achieve it,” Brady says.

“So, we might want to do a strategy where we start putting more of the funds into those conservative or defensive-style assets.”

Brady said first-time investors could also look for online investing platforms that offer auto rebalancing of portfolios based on your desired weightings.

She said investors should keep up-to-date with new products that come onto the market and consider:

• Is a product more relevant and a good replacement for what you’ve currently got?
• Whether to keep existing assets but direct new money into additional products?
• How would any changes affect the diversity/weighting of your overall portfolio?

Brady said one way to take financial self-care seriously was to have an annual or semi-annual ‘money date’ with yourself and your significant other, if you have one.

“We have to build this into our life. We spend our life working to get money and we don’t spend almost any time thinking about how do we deploy that money strategically. And so: put a time in your diary.”