Investing 101:
what beginners
need to know
before putting
their money
to work

Make sure you’re financially ready to invest

Before putting your hard-earned cash into any investment vehicle, ensure you have a cash buffer set aside for emergencies. A general rule of thumb would be to have around 3 to 6 months of ‘essential’ expenses set aside in a high-interest savings account, just in case there’s an interruption to your work, or an unexpected expense crops up.

Once you’ve built surplus funds above and beyond the cash buffer, determine which ‘entity’ or ‘structure’ you will invest in.

Common structures include:

• Personal name (most common)
• Joint names (you and another person, or people, sharing ownership)
• Trust (distributes income to beneficiaries of that entity)
• Company
• Superannuation

Note that superannuation is a structure in which we own investments, and not a specific ‘investment’ itself.

Examples of investments include:

• Term deposit/high-interest savings accounts
• Shares
• Managed funds
• Property (either direct or indirect)

Most structures can hold all the investments above, though it’s worth knowing that the type of structure used will impact the way the income derived by the investment is taxed.

A person may receive income directly into their personal name, via a jointly held investment, or be a beneficiary of a trust. Income received in one’s personal name from either of these methods will have the marginal tax rate tiers applied (in addition to their income from work):

A flat rate of 15% tax applies to investment income generated within a superannuation fund, making it a tax-effective structure to accumulate wealth relative to other structures.

Despite its tax effectiveness, funds invested via superannuation are not accessible until a person meets a condition of release, meaning the funds are not generally available until retiring from the workforce.

Learn the game: prepare for market fluctuations

Most people start investing in their personal name to retain accessibility to the funds invested.

While saving to ‘start’ investing, investors can become accustomed to their cash savings building up as they receive interest on their balance. If the investor happens to use some of their cash savings to pay a bill, they expect their bank account to reflect the money paid to exit their account.

For many beginner investors, there is a similar expectation that invested money will only ever increase in value – similar to their savings – however, this is not always the case.

Note the example below:

An investor purchases 50 shares in company ASX:ADK at $100 per share, resulting in a total investment cost of $5,000. If the share price of ASX:ADK decreases by 2% (to $98), the value the investor will see for their shares will be $4,900. The market price could just as easily increase by 2% (to $102 per share), and the value the investor will see for the shares would be $5,100.

The reality is company ASX:ADK may not have reported any particular success or failure and the share price on offer may move simply due to market sentiment on any given day.

One truth of investing is that valuations of investments will fluctuate, and obtaining experience with this and becoming accustomed to market movement can take time. One way to gain exposure to investment markets without risking your own money is to participate in the ASX Sharemarket Game. The game gives you $50,000 in virtual cash to buy and sell shares in 300+ companies listed on the ASX using live prices, simulating real sharemarket conditions.

Shadforth has produced a great introduction to investing resource, which explains some of the common terms associated with investing. ASIC’s Moneysmart website also contains resources relating to starting out in investing.

Emotional investing is risky – discipline is paramount

Many people struggle to separate their emotions from investing.

As mentioned above, markets go up and down, but reacting to current market conditions may lead to making poor investment decisions at the worst times.

Sticking to your plan is one of the most important principles, but can also be one of the hardest parts of successful investing. Having the confidence to look through short-term volatility is essential. The misplaced belief that short-term market events can be managed can lead you to make reactive decisions that conflict with your long-term goals.

When people follow their natural instincts, they tend to apply faulty reasoning to investing. Some common mental errors people apply when investing include:

• I have a proven system for picking winners
• I read this was a great share to buy
• I knew this share was on its way up
• I work in the industry, so I know where it’s going
• It was a bad idea, but I don’t want to sell at a loss
• The trend looks good and should continue for a long time
• I wasn’t wrong about that share – just unlucky.

Discipline is important, but most of us can’t do it alone. That’s why advisers like me are here – to help you build a plan for when times are challenging. A good adviser will be there to help you remain disciplined and focused on your goals.