If you’re just starting out as an investor, there’s a lot of information to absorb. In this series of articles we will define and explore the fundamentals of investing.
#4. Developing your Investment Strategy
There are a number of factors to consider when building your investment strategy. Here we take a look at the key fundamentals that set the foundation for a sound investment strategy that can deliver consistent outcomes over the long-term.
Another way of managing or reducing investment risk is through diversification. This is the strategy of investing your money across a range of different investments. The exact mix of investments you choose will depend on:
- your financial objectives
- the amount of time you have available to invest
- your personal tolerance for risk.
Diversification is important because every type of investment has its ups and downs. Owning a diverse range of investments can help you achieve smoother, more consistent investment returns. The more ways you diversify, the more you can reduce your risk. For example, you can invest:
- across different investment types or asset classes (cash, fixed interest, property, shares)
- in more than one investment within each type (e.g. invest in several different industries and companies when investing in shares)
- in more than one type of fund, and more than one fund manager, when investing in managed funds
- inside and outside of super.
Dollar cost averaging
By implementing a regular investment plan you will be able to take advantage of ‘dollar cost averaging’. When you invest a set amount at regular intervals, sometimes you will purchase units or shares at a higher price, and sometimes at a lower price. Over time, this spreads out your costs and insulates you against changes in the value of the assets you are purchasing.
The Power of Compounding
Compounding is often described as ‘earning interest on your interest’. Each time you earn a dividend, distribution or income payment from your investment, you reinvest it to buy more units or shares. In turn, these reinvested earnings generate additional earnings. Compounding can make a huge difference
to the value of your investment over time. To take full advantage of the effect of compounding, think about starting early and leaving your money invested for as long as possible.
Timothy Donlea & Artemas Wealth Management have been providing advice to clients for over 20 years. Contact us today by clicking here or alternatively by calling us for a confidential discussion on 02 9221 9699.
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