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Investing 101: #1 Understanding Investing
For anyone who has never invested, the idea could seem a little unnerving at first. More often than not the reality is a far cry from the fast-paced trading floors we see on movies about Wall Street.
Savers will be familiar with the idea of putting money on deposit in the bank (or with another savings provider) and receiving interest at the end of the year. What they might not give much thought to, is that the interest rate paid is directly linked to what the bank earns, using their money, to lend to other people.
That’s why deposit rates are so low right now, because lending rates are also at an all-time low, meaning providers have less to share with savers.
To make things worse, customers with savings accounts that charge fees for account maintenance and activity might end up losing money by the time they factor costs, Deposit Interest Retention Tax (DIRT) and inflation into the equation.
As a result, savers looking for even a slightly higher return may need to think beyond deposit accounts and investing could be a natural next step for many. You don’t have to be rich, a stock market expert or finance guru to do it either. In fact, many of us are already investing without realising it.
Saver turned investor
Everyone who is a member of a workplace pension scheme or who pays into a Personal Retirement Savings Account (PRSA) pension account is an investor. The savings you put into a pension scheme are invested on your behalf in a range of assets, like stocks and shares, property or government bonds.
Some of it will be held in cash too, but it’s the invested portion that’s expected to make the returns required to help your pension pot grow.
There’s lots of help available for anyone who wants to bridge the gap between saving and investing and opportunities exist to satisfy the most cautious and conservative investors.
It’s a simple enough trade-off; lower-risk generally aims for more modest, long-term gains, while higher-risk strategies push the boundaries in search of higher gains.
Multi asset funds
Multi asset funds are a popular choice for Irish savers moving into the investment space, because they have been designed to suit different attitudes to risk. Making it possible to have a diversified portfolio (in cash, shares, property and bonds), experienced management and the level of risk you’re most comfortable with, in one package.
Multi asset funds pool money invested from large numbers of people and they’re managed round the clock by experienced fund managers who make decisions about how much is invested where and when.
Risk, time and affordability
Risk, time and affordability are key and investors are encouraged to understand exactly where they sit on all three before they start.
Risk questionnaires are a great place to start if you’re still working out how much risk you’re comfortable with and any good financial advisor will be able to help you too.
As for time, investors are advised to think long-term. Markets will always fluctuate, so it’s important to give them enough space to rise and fall, and avoid the risk of trying to time the markets. Long-term investments tend to fluctuate less than short-term investments.
Then there’s understanding how much you can afford to invest - and that’s where you will see the benefit of sound financial planning. Setting out clear financial goals and objectives is a great way to focus your thinking and create milestones. Whether the end goal is it’s paying for your kid’s school fees down the line or feathering your retirement nest, it’s important to understand how much you can afford to invest and how any potential gains could fuel your bigger plans.
Professional advice can offer a huge amount of help on all three, so ask for an expert opinion when you need it. A financial advisor can explain everything in more detail, help you find your comfort zone and offer advice on how to manage your money best.
With the right help and support, even a cautious saver could become an avid investor.