Where to start for first-time investors
A quick guide to point you in the right direction
If you’ve cleared all of your debts and have savings, you're in a great position. It’s time to start thinking about investing.
Learning about investing can be overwhelming when you don’t know where to begin. Fortunately, investing doesn’t need to be complicated to achieve good returns.
Investing is long term
There’s no such thing as short term investing. It’s impossible to predict market movements short term. Anyone who tries to do so is gambling and will likely lose money.
Therefore by definition, investing is long term. It requires patience.
How much you decide to invest depends on your personal situation. Funds that are required in the short term (less than 5 years) should be separated from funds that can be invested.
Short term volatility of the market can be scary. By investing and locking your funds long term, you reduce the impact of volatility and you can effectively manage risk.
“Rule number 1: Never lose money. Rule number 2: Never forget rule number 1.” — Warren Buffett
Where should my short term funds go to?
Find the highest interest savings account that you can maintain. Be sure to look at the requirements for bonus interest if applicable. It’s very little effort to maximise your returns risk-free.
It’s time to invest
A great way to invest for stable long term returns is by investing in an index fund. This can be done by buying an Exchange Traded Fund (ETF) in the stock market.
An index tracks the value of a portfolio of shares. By investing in an index fund, you will own a portfolio of shares.
One index that you may want to track is the S&P 500. Based on the historical returns of the S&P 500 index, which includes market crashes, you can expect an average return of 7-9% p.a. The compounding effect of these returns is where investing really pays off.
At a rate of return of 8% p.a, a one time investment of $10k can increase to $93k in 30 years.
Let’s see what happens if we were to add $5k to our initial investment of $10k every year:
This time, we end up with $613k after putting in a total of $155k throughout the 30 years.
You will do very well by investing in index funds, and in most cases outperform managed funds.
Index funds are a great way to start, and potentially it’s all that you need. Warren Buffett, the greatest investor in the world, encourages people to consistently invest in a low-cost S&P500 index fund.
This is by no means a complete guide. I would encourage you to dig deeper to improve your understanding. My hope is that I’ve provided you with enough information to guide you in the right direction.
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