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Investing is one of the most effective ways of increasing wealth over the long term. It involves carefully selecting assets with the aim of growing your money to reach your investment goals. Contributing to financial security and providing more flexible lifestyle choices, investing is an important discipline that should be started as early as possible.
In the current inflationary environment, investing has become even more important. Many workers are set to retire on lower incomes than those of previous generations and the default investment alternative of keeping money in the bank risks eroding the value of cash savings.
Each one of us will have different circumstances to consider, such as age, level of income and retirement plans, so investment planning will vary. A number of factors need to be considered:
While investors have varied aims, there are questions they will need to answer before laying the foundations for their portfolio. These include deciding the investment time horizon and the level of portfolio risk which can, and should, be adapted as circumstances alter. All investors should have a strategy to help them deal with changes in their personal circumstances or in the financial markets.
Within a portfolio, equities, bonds, alternatives and cash (known as ‘asset classes’) all provide distinctive characteristics. Equities typically provide the growth component, bonds offer a regular income (called ‘yield’) while alternatives provide a further level of diversification. Cash, considered the most liquid asset because it can be easily turned into other assets, is quickly accessible and low risk. The proportion that should be invested in each asset class will depend on an investor’s goals.
Investors should not necessarily be concerned just because the value of their portfolio falls, nor should they become complacent when it is performing well. A portfolio is likely to benefit from regular monitoring and maintenance, especially as financial markets are constantly adjusting to new variables. This means the assumptions behind investment decisions, as well as their ‘fair value’ assumptions, can change.
Investing and trading are different approaches to the financial markets. Investing employs a fundamentals approach, the value of what is bought and held being key considerations. In contrast, traders generally hope to maximise returns by exploiting moves in financial markets and instruments. Investment fundamentals are usually less important for traders but therefore trading is considered much riskier than investing.
Setting financial goals for investors allows them to focus on decisions that will contribute to their overall objectives, rather than monitoring the outcomes for a range of individual investments. Just like goal setting in life, it can help individuals focus their behaviour and remain motivated.
Groupings of investments that have similar financial characteristics, each asset class carries its own set of risks and rewards. Investors’ investment goals, like their personal circumstances, differ and so asset class weightings vary.
For investors, risk represents the chance that a particular outcome or financial gain differs from its expected return, however, it’s important to recognise that risk is an inherent part of investing and that there are different types of financial risk.
A fund is a type of investment that enables multiple investors to collectively purchase securities, whilst retaining ownership and control of their shares. Similar to a listed company, a fund is owned collectively by its shareholders, with an investment objective and policy dictating what the fund manager purchases.
From year to year, it is difficult to predict which asset classes will be the best performers. Most investment specialists agree about the benefits of spreading your money across different investments. This diversification can reduce volatility, smooth out highs and lows in returns and help avoid unnecessary risk.
Only investing locally means missing out on opportunities offered by global markets. Better diversification, more investment options and reduced volatility are among some of the reasons investors should consider investing globally.
Both savings accounts and multi asset funds can offer benefits for investors. Over the long term, investing and saving can complement one another and potentially help towards achieving financial goals.
Instead of focusing on just one type of investment, multi-manager funds invest in lots of other single-focus funds. This can allow investors to choose a single fund that diversifies investments and combines the talents of many fund managers all in one.
Devising a plan encourages investors to formulate long term and short term goals. These should seek to maximise risk adjusted returns, but ensure enough flexibility to take account of market surprises and potential volatility.
This is the financial equivalent of “don’t put all your eggs in one basket”. Portfolio exposure to a range of assets and regions will supply differing investment characteristics, helping to minimise an investor’s overall investment risk.
Compounding, which is the effect of earning interest on interest over time, can have a significant positive effect on investment returns. That’s perhaps why Albert Einstein is said to have described compound interest as ‘the most powerful force in the Universe’.
Financial markets continue to throw up opportunities to make spectacular investment returns, but many of these will prove to be speculative bubbles, when an asset’s price greatly exceeds its fundamental value. An asset bubble will inevitably burst, leading to losses. In contrast, sensible investing, which means holding a well diversified portfolio for the long term, could be viewed as quite boring by comparison, but is likely to deliver superior returns.
Regular savings are the key to building up your portfolio. Rather than thinking thousands of dollars are needed, you can start investing from as little as $50 a month. Setting money aside to fund an investment portfolio is a good discipline and puts you in a much stronger financial position later on.
When you’re new to investing, getting started can seem like an uphill struggle. That’s why we decided to create a starter pack to help demystify the process and provide an introduction to the basics.
Access a range of articles, podcasts, videos and useful materials from our expert team at AXA IM Select and our leading, global fund group partners. You will find information on a variety of topics such as financial markets, multi-manager investing, macroeconomics, responsible investing and ESG and themes such as megatrends to help keep you up to speed on the latest news and views.
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