Before you start investing
Following a successful launch last year, we were excited to tick off our first workshops for 2019 in Wellington and Auckland. At your request, these workshops focused on some of the things you should know before you invest.
In this post we have written a useful summary of what was covered in those workshops, including:
What is risk?
How do I work out my investor profile?
Why does investing worry me so much? (a.k.a crash course in loss aversion)
Understanding different types of investment options.
For those who attended our workshops, we hope this is a useful refresher. For those who didn’t (you should definitely come to our next one) this will be useful guidance for you as you start, or continue, your investing journey.
As always, we are not qualified to provide you with personalised financial advice. For a full disclaimer, please see our legal stuff here.
What is risk?
What is risk? Risk is the chance that you won’t get the return you want, or the chance that you will lose some, or all, of your money. That sounds kind of scary, but risk can be understood and managed. Our guest speaker for both workshops was Gillian Boyes, Head of Investor Capability at the Financial Markets Authority (the government organisation that watches over certain 'regulated' financial products). Her main message for us was that you need to know enough to be comfortable with the risk you’re taking when you invest, but you don’t need to be an expert. A very real risk for lots of women is the risk of doing nothing – you could be losing $35 a day if you only start investing at 35 years old compared to at 25. Don’t let a fear of risk prevent you from investing (more on that next), but go in with your eyes open!
Your investor profile determines, in a broad sense, the amount of risk you should plan to have with your investments. It weights up things like your age, how long you want to invest for, and your personal comfort with the possibility of negative returns (losing some money!). Typically, younger investors are told that they can accommodate a higher degree of risk in their portfolio than older investors, but that may not be true if you hope to use the money you’re investing in the next few years (e.g. to buy a house)! You should always take into account your own circumstances, and seek professional advice where possible, as these general rules may not always apply to you.
To calculate your own investor profile, we recommend the Investor Kickstarter quiz on Sorted where you’ll come out as one of the following five investor types from Defensive (less risky) to Aggressive (most risky). This helps you identify whether you would be comfortable investing primarily in riskier assets (like shares) or less risky assets (like cash or bonds).
We also had a bit of a chat about loss aversion, a behavioural economics term that basically means that people tend to hate losing a dollar twice as much as they like gaining a dollar. Because of this, we will often make irrational decisions.
For example, most people would rather a the certain gain of $500 than taking a 50/50 chance of gaining $1000. However, those same people would also prefer to take a 50/50 chance of losing $1000 than the certainty of losing $500. What does this show? We’re prepared to take risks to avoid loss (because we hate loss so much), but we are not prepared to take the same risk to make a proportional gain.
What this all boils down to is that loss aversion can distort our vision of reality so that we make illogical and irrational decisions about our money. But you can make loss aversion work for you by remembering that by not investing, you are actually losing money because it's getting eaten up by inflation!
Types of Investments
So if we don’t want our money to be eroded by inflation, what are the alternatives to savings accounts or stashing under the bed?
If you're a starting out on your investment journey, there are some standard investment types that you might want to start looking at more closely:
Bonds (debt securities)
ETFs (Exchange Traded Funds)
For those that attended our workshop, head on over to our closed Facebook group, where we have provided a more in-depth analysis of each of these types of investments.
So you’ve got your investor profile, you know all about risk and how to make loss aversion work for you, and now you’re familiar with the main types of investment products. So where to from here? These are some quick actions you can take right now:
If you don’t have one already, build a savings buffer before you start investing. That means saving at least 3 months’ worth of expenses – you don’t want to have to be pulling out your investments sooner than expected to cover an unexpected circumstance.
Make your current investments (including KiwiSaver!) match your investor profile. Change KiwiSaver funds if you need to.
Talk to your friends and family about their investing attitudes and experiences.
Do some of your own research into one of the investment types above that you found particularly interesting, and then teach someone in your life all about it.