Basic investment principles
Despite years of financial education, it is still a sad reality that heavy losses incurred by investors are still making headlines. Therefore, as the financial year draws to a close, let’s revisit the basic investment principles.
The first is diversification - don’t have all your eggs in the one basket. Usually the people who have suffered the heaviest losses are those who have chosen to put their entire life savings in one product. Remember, a savvy investor has their portfolio spread in a mix of cash, property and shares.
The next is to understand that higher potential returns mean higher risk. These days you can obtain a safe 6% in government-guaranteed bank deposits – what is the point of investing in risky areas just for the sake of an extra 1% or 2%.
In some ways debentures and other interest producing investments carry an especially high risk – if your investment goes bad, you usually lose your entire capital. In contrast, if you invest in property or shares you are more likely to risk only part of your capital and you often get that back if you can stay in there until the next uptrend comes.
Make sure you take inflation into account when deciding where to invest. It is certainly comforting to get a safe 6% in the bank, but over the long term inflation will erode your precious capital. Haven’t you noticed how much prices have risen in the last five years?
Don’t be frightened of shares. There are now some great managed funds out there with a good track record and who invest in a range of quality shares. You can start with just $1,000 and the assets in which they invest give you automatic diversification.
Finally seek advice. Often those who lost it all responded to newspaper ads or cold canvass techniques. Good advice doesn’t cost, it pays.a
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org