Investment

Investment basics

Read about some of the strategies the professionals use to make the most of what you've got.

What are the five key investment principles

1. Start early, invest regularly and reinvest returns

The earlier you start investing, the more chance your investment has to grow through the magic of compound interest - which means you're earning interest on your interest. Einstein called it 'The most powerful force in the universe.

Investing the same amount at regular intervals, known as dollar cost averaging, can help take the guess work out of investing as you don't have to worry about trying to time the market. If the market is falling on the day you buy, you'll get more units/shares on that day. It's the opposite when the market rises. This tends to average out the investment price and smooths out market fluctuations.

It also means you don't risk investing a large amount at the wrong time or waiting too long and missing a rebound in the market.

2. Set your investment goals

You need to have a clear understanding of your investment goals, then select the right investments to achieve them.

You also need a budget to help you assess your current financial situation and how much you can spare.

You can then have this amount automatically deducted from your pay to your investments. It's the tried and tested way to stick to an investment plan.

3. Diversification

Do you want to have all of your eggs in one basket, or a few?

Simply put, diversification is about investing in different markets, so if one goes down, you can minimise the impact by being in a market which goes up. In economics, some markets tend to move counter to each other.

This effectively lowers the risk across your portfolio by spreading the risk. This has a smoothing effect on your investment returns - you generally won't get the huge gains, but you shouldn't experience the big losses.

4. Timing the market versus time in the market

Timing the market is when you try to buy when the market is low and sell when it's high. Anticipating the market's movements can be extremely difficult.

Giving your investment time in the market allows it to recover from short-term downturns and experience the highs of the market. History shows that while shares may experience negative returns over the short term, returns tend to be higher than cash over the longer term.

5. Invest for the long term - the trade off between risk and return

All investments involve some degree of risk. And generally, when chasing higher returns there is an increased risk of negative returns. How comfortable you are with this will determine the types of investments you should be in. It's called an investor profile.

You'll need to strike a comfortable balance between the risk you're prepared to take and your desired return. As a general rule, the longer the timeframe, the more risk you can afford to take.

You should also remember your strategy depends on your attitude to risk, your financial situation and goals.

Simply by thinking about these questions, you're on your way to developing a sound investment strategy.