Australians beginning their investment journey can find information about a wide range of investment options. Search for investment tips and you’ll find opinions on shares, ETFs, property, superannuation and countless other opportunities.
Before deciding where to invest, though, it can be more useful to understand what you need to consider. Investing involves more than selecting an asset that has performed well in the past. Your goals, timeframe, financial position, risk tolerance, costs, tax position and existing diversification can all influence whether an investment is appropriate for you.
This guide sets out the questions Australian beginners can work through when researching and evaluating investments.
Start With Your Situation, Not the Asset
Before comparing shares, ETFs or property, it’s important to first understand your own financial position, goals and circumstances. An investment that may be suitable for one person may not be suitable for another.
What Are You Investing For?
The first consideration is your objective. Are you investing for a short-term purchase, a medium-term goal or long-term wealth creation? Your answer can influence the types of investments you consider. Money you expect to need within a few years may require a different approach from money invested for retirement. A clear objective also makes it easier to assess whether an investment aligns with your circumstances, rather than simply choosing something because it is popular.
How Long Can You Stay Invested?
Time horizon is closely connected to investment risk. Some investments can fluctuate significantly over relatively short periods, and if you need to access your money soon, a substantial fall in value could be difficult to absorb. A longer horizon may give you more capacity to withstand short-term volatility, but it does not eliminate the possibility of losses. Consider when you are likely to need money and whether you could tolerate a significant change in its value along the way.
How Much Risk Are You Comfortable With?
Every investment involves some form of risk. Shares can experience substantial price movements. Property can fall in value and may be difficult to sell quickly. Bonds are affected by factors including interest rates and credit risk. Even cash can lose purchasing power through inflation. Consider not only how much risk you can afford to take, but how you might react if the value of your investment falls. An approach that looks suitable when markets are rising can feel very different during a downturn.
Is Your Financial Position Ready?
Investing is best considered as part of your broader financial position rather than in isolation. Before investing, it is worth considering whether you have accessible savings to cover unexpected expenses. Without an emergency buffer, you may need to sell an investment when markets are down, potentially realising a loss. It is also important to consider any high-interest debt, such as credit card balances. Where interest costs are high, reducing that debt may have a more certain impact on your financial position than relying on an uncertain investment return.
Your income stability, existing financial commitments and insurance arrangements can also influence how much you can comfortably invest and the length of time you can remain invested.
Investment Strategies for Beginners: Portfolio-Level Considerations
Most investment strategies for beginners are less about picking individual assets and more about how a portfolio is constructed and what it costs to run.
Are You Diversified?
Rather than relying heavily on one company, sector, asset class or geographic market, investors can consider spreading exposure across different investments. ETFs and managed funds can provide diversification by giving investors exposure to a portfolio of underlying assets, although not every fund is broadly diversified. Diversification does not guarantee against losses, but it can reduce the impact of a single investment performing poorly.
What Will It Cost?
Returns are only one part of the equation. Depending on the investment, costs can include brokerage, management fees, administration fees, spreads, platform fees and other charges. When comparing investments, consider the total cost and how those costs could affect returns over time. A lower-cost investment is not automatically better, but understanding what you are paying for supports a more informed comparison.
How Does Tax Apply?
Selling certain investments for more than their cost base can result in a capital gain. Eligible individuals may generally be entitled to a 50% CGT discount on qualifying assets held for at least 12 months, subject to the applicable rules. Dividends can also have tax implications. Australian companies may attach franking credits to eligible dividends, reflecting tax already paid at the company level. Tax outcomes depend on individual circumstances, so consider obtaining professional tax advice where appropriate.
What Role Does Superannuation Play?
For many Australians, superannuation will become one of their largest financial assets. Super funds invest contributions across different asset classes according to the investment option selected, ranging from more conservative portfolios through to growth-oriented options. Understanding what you already hold through super can be useful before making additional investments elsewhere. Super is generally designed for retirement, so its role can differ from investments intended to meet shorter-term goals.
Assessing an Individual Investment
One of the most important considerations for a beginner is simply understanding the investment. Ask yourself:
- What does the investment actually own or invest in?
- How does it generate potential returns?
- What could cause its value to fall?
- How easily can you access your money?
- What fees apply?
- Who manages or operates it?
- Are there eligibility requirements?
If you cannot explain how an investment works, taking more time to research it may be worthwhile before making a decision.
Is the Investment Available to You?
Australian financial services law distinguishes between retail and wholesale investors. Certain financial products and services may only be available to investors who meet applicable wholesale client requirements, which is particularly relevant when researching private-market and alternative investments.
Seeing an investment discussed online does not mean it is available to every investor. Check its eligibility requirements and understand whether you qualify to access it.
Who Is Offering the Investment?
Regulation and licensing are important considerations when researching an investment opportunity. Where an organisation is providing regulated financial services, investors can check its Australian financial services licence (AFSL) and the scope of its authorisations. An AFSL does not mean that an investment is guaranteed, suitable for everyone or free from risk. It is one part of the due-diligence process. Investors should also be cautious about unsolicited opportunities, high-pressure sales tactics and claims of unusually high or guaranteed returns.
Are You Making a Decision Based on the Past?
Past performance can be useful information, but it should not be treated as a prediction of future returns. An investment that has recently performed strongly may attract significant attention. However, markets change, valuations change and individual investments can perform very differently over time.
Consider an investment’s underlying characteristics and risks rather than focusing exclusively on historical performance.
Does It Fit Your Overall Portfolio?
Finally, consider the investment in the context of everything else you own.
A particular investment may appear attractive on its own but create excessive concentration when combined with your existing holdings.
For example, an investor may already have significant exposure to Australian shares through superannuation and other investments. Adding another investment with similar exposure could increase concentration without necessarily providing as much diversification as expected. Looking at your portfolio as a whole can therefore be more informative than assessing each investment in isolation.
A Beginner’s Guide to Investment: The Bigger Picture
A useful beginners guide to investment goes beyond identifying potentially attractive assets. The more important questions are about suitability: What are you trying to achieve? How long can you invest? What risks can you tolerate? What costs and taxes apply? How diversified are you? And do you understand both the investment and the entity offering it?
These considerations provide a framework for researching investments without relying solely on market trends or someone else’s approach.
Disclaimer: Issued by Trivesta Funds Pty Ltd ACN 627 270 900 (Trivesta Funds), a Corporate Authorised Representative (AR No. 1274820) of Trivesta Capital Ltd ACN 126 975 282, AFSL 320497 (Trivesta Capital). Trivesta Funds is authorised to provide financial services in connection with the Trivesta Protected Yield Fund (Fund). The information on this page is general only and does not take into account; your objectives, financial situation or needs, and does not constitute legal, tax, financial or investment advice. The Fund is available only to wholesale clients (including sophisticated investors) under section 761G or 761GA of the Corporations Act 2001 (Cth). Offers to invest in the Fund will only be made via an Information Memorandum (IM) issued by Trivesta Funds. Investment is subject to risks, including capital loss, delays in repayment and loss of income. Past performance is not a reliable indicator of future performance. Returns, income and capital preservation are not guaranteed. Visit www.trivesta.com.au for further information.
