A Practical Introduction to Investing: What You Need to Know to Get Started

You can’t be what you can’t see. Many millennial women are the first generation of women in their families who are actively thinking about and planning for their financial future by exploring the best options to grow their wealth. Investing is an integral part of building long-term wealth for women, but it can be hard to know how to get started: research undertaken by ASIC shows that 85% of Australian women under 35 say they don’t understand fundamental investment concepts. Our practical guide is here to shed light on this important topic and sets out some of the key issues to consider when you are ready to explore investing.

Why Is Investing Important For Women?

While women’s participation in the workforce is greater than ever, many continue to find money decisions overwhelming. A recent ASX study found that one of the practical effects of this is that while women make up 42% of current investors in Australia, they have smaller portfolios than men, tend to hold fewer assets, are less diversified in their investments, and have less awareness of the variety of investment options available to them. Women are also more conscious of barriers to investing, including the risk of investment underperformance, the fear of hidden fees and the effects of information overload.

The good news is that this study also shows that women are keen to expand their knowledge about investing, prefer to consult diverse information sources when making investment decisions, and are more open to seeking expert advice. Women are also more likely to stay the course with their investment strategy and maintain their investment strategy during market fluctuations. They are less inclined to take financial risks when it comes to choosing their investments, which can mean that they avoid the potential pitfalls of losses associated with more speculative ventures.

“To plant a garden is to believe in tomorrow.”    audrey hepburn

What Are The Benefits of Investing?

In a nutshell, investing involves putting your money to work by building a portfolio of assets that will grow in value over time and provide you with a steady stream of income into the future. Investing is an essential strategy for achieving long-term financial security and independence. By taking advantage of compounding interest to grow your money faster, investing can help you achieve your financial goals quicker, whether that is buying your dream home, funding further education, starting a business, enjoying a passion project or planning for your retirement.

Investing can also be a powerful way to stay ahead of inflation and protect the real value of your money and purchasing power, assuming that the value of your investments grow faster than inflation rates. One of the mistakes that can seriously set women back financially is to play it safe and favour cash savings over investments that could yield far greater returns and be instrumental to building wealth. 

A further important benefit of investing is that it can provide a valuable opportunity to improve your financial literacy and confidence. Lack of financial awareness and education for women may mean leaving significant money on the table. Even small investments will help raise your general knowledge and money expertise: there is no better way to improve your understanding of the economy and financial markets than by having some skin in the game to keep you interested and engaged.

When Should I Start Investing?

You might be wondering, am I actually ready to start investing? Before you dive into the world of investing, it is important to consider your current financial situation and the state of play at Financial You Inc. Identifying specific financial goals will help guide your investment strategy and make sure that you stay focused.

Some of the steps you might consider taking to identify whether you are ready to start investing might sensibly include working through this handy checklist:

• Understand your current cashflow, savings and liabilities
• Develop a budget and identify your capacity to earmark a portion of your income to invest
• Eliminate any high-interest debt such as credit cards
• Build an Emergency Fund you can dip into should any unexpected life events arise

Having worked through these steps, you may find that with a healthy income, commitment to a savings plan, an Emergency Fund in place to help you navigate unexpected life events and holding only modest levels of debt, you are ready to put your money to work and embark on your investment journey. Alternatively, you may identify the areas where you need to focus your attention before making investing a reality for you.

In any event, regardless of where you are on the journey, there is no time like the present to educate yourself and develop an actionable plan to achieve your financial goals: knowledge is key to making informed investment decisions that are going to be right for you.

How Does Investing Actually Work?

Investing is a powerful tool that can help achieve your financial goals. At its essence, investing involves putting your money into one or more asset classes such as shares, super, property or bonds, with a view to building you wealth through a positive return on your financial outlay. Typically, your money may grow as a result of an increase in the value of your assets over time and/or by earning an income from your investment (for example, in the form of share dividend payments or rental return from an investment property).

Investing also allows you to tap into the magical power of compounding, where you reinvest your returns to accelerate your financial gains. This might look like earning interest on the ‘principal’ savings you have in the bank, as well as on any interest you have already earned on your cash. It could also mean investing any dividends you earn from your share portfolio to buy more shares. Or putting your rental returns or capital gains from an investment property towards purchasing your next piece of real estate. The key is to stay the course and continue to put the money you earn back into investing to keep generating tidy returns.

Remember that time is the essential ingredient when it comes to letting your money work for you: the longer your timeline, the greater the returns you can expect on your investments. Want to run some numbers to see where compound interest can take you financially? Check out this handy calculator for some inspiring insights!

How Do I Choose an Investment Strategy That is Right For Me?

It is important to consider your specific financial goals, risk tolerance and investment timeframes when considering the investment strategy that is right for you. Thinking through some of the following questions can help narrow down the type of investment that might be suitable for your situation:

• What is the purpose of my investment?
• When will I need the money I put in investments?
• How much time and effort do I want to put into managing my investments?
• How much do I have to invest right now?
• How sensitive am I to risks such as market fluctuations?
• Do I understand how the specific investment works, including fees, charges and potential tax implications?

Before starting, it makes good sense to have a clear idea of what you want to achieve with your investments, as different asset classes may be more or less suited to attaining your specific objectives. Consider whether you are looking to grow your wealth for the long-term and are happy not to have access to your money for an extended period of time, or if the opposite is true and you may need to sell your investment at short notice or expect to draw on any income generated straight away.

Next, you will want to settle on a strategy that suits your current level of knowledge, skill and confidence. Are you a seasoned investor excited for a high level of involvement in the management of your portfolio, or just starting out and looking for some reasonably simple options to get some wins on your investment board? If you are in the latter category, sticking with tried and true blue-chip investment options may be a good place to embark on your journey.

How much you have readily available to invest will also help shape the right strategy for you: buying a small parcel of shares is viable with as little as $500, or even less with some micro investing platforms, while purchasing an investment property or launching a new business is obviously going to require more savings and planning.

You should also consider your general risk tolerance and exposure to market fluctuations in weighing up your options. Some investments carry more risk than others, but they may also offer higher returns. Younger investors with a longer time horizon will have more time to recover from market downturns, allowing you to consider investments with higher growth potential. However, if sleeping well at night is key, investments with a high level of volatility may not be the right strategy for you.

Finally, when considering a particular investment option, ask yourself whether you feel confident that you understand the basics of how the particular asset works, the returns you can expect, potential risks involved, and the costs and fees associated with the investment. If there is a level of complexity that makes you uncomfortable, explore options to fill your knowledge gap or consider alternative investment classes that better align with your needs.

What Are My Investing Options?

Now that you have some clarity on the type of strategy that might best serve you, it is time to consider the particular asset classes that might be right for you. Some of the most common investment options, with potential advantages and limitations, include:

• Shares: This option involves purchasing shares in publicly listed companies, with a view to seeing the value of the shares increase over time. Investors may also expect to enjoying a portion of company profits through regular dividend payments along the way, although this of course, is not guaranteed. You can purchase shares in a specific company you wish to hold, or gain exposure to a broader basket of shares through exchange traded funds (ETFs) or managed funds.
  • Upside: This is an approachable asset class: with the cost of entry low and the purchase process straightforward, it is easy to dip your toes into investing by purchasing a small parcel shares. Shares allow you to build up assets gradually and offer greater scope for diversification, particularly if you are investing through ETFs that offer exposure to a broad range of companies.
  • Downside: Periods of volatility in the share market are more apparent as the performance of shares can be tracked daily, and may require you to avoid rash decisions when prices fluctuate.

• Super: Making additional contributions to your super fund to boost your retirement savings can be an excellent investment in your long-term financial wellbeing. The super concessional contribution is currently capped at $27,500 per year, but the carry-forward rule may allow you to make additional contributions for up to five years for any unused portion of this amount you may wish to top up.
  • Upside: There is no minimum investment amount: simply contribute as much or as little as makes sense to you. There are significant tax benefits associated with making voluntary contributions that make this option attractive. Super contributions are straightforward, but remember to check in regularly to review your statements and investment strategy, and make adjustments as necessary.
  • Downside: You won’t have access to your money until you reach your preservation age, which for millennials means the age of 60. As such, while this investment option has many benefits, it is unlikely to suit if you anticipate you will need to access your money before retirement.

• Property: This strategy involves buying a property with the goal of seeing long term gains in the value of your investment. The rental income earned will cover some or all of the expenses you incur in holding the property, and may even leave you with a surplus, particularly as the years roll on.
  • Upside: Properties tend to see more stable growth and allow you to leverage your investment by using a home loan (i.e. the bank’s money) to rapidly build wealth. Once you start building up equity in your first investment, it becomes easier to purchase additional properties to build your portfolio and notch up additional financial wins.
  • Downside: Unless there is a trust fund with your name on it, the high upfront costs make it challenging to get into the property market, or to achieve diversification. The time, effort and cost of buying or selling a property also makes it harder to access your cash, should you need funds quickly. You should also expect to have greater ongoing involvement in managing property issues or challenging tenants (get that plumber on speed dial, friend)

• Bonds: When you invest in bonds, it’s a pretty simple setup: you are lending money to a government or company in exchange for payment of a fixed interest rate to you on a set payment schedule.
  • Upside: Bonds generally have a low cost of entry, provide a stable and predictable income, offer scope for investment diversification and have lower levels of volatility than other types of investments. They can provide diversification and stability to a portfolio of assets as a relatively safe investment.
  • Downside: Bonds may offer lower returns than other investment classes and are exposed to interest rate risks: as interest rates go up, you could end up holding a bond instrument that yields below market rates. For younger investors with time on their side, the lower returns offered by bonds may be less attractive than some other asset classes, but bonds can certainly form part of a balanced portfolio for those seeking to temper the volatility of other investments.

• Business and education: Investing in your own business or further education can be money well spent, with the potential to lead to significant long-term benefits. If you have an entrepreneurial spirit, starting a business can proved an opportunity to pursue your passion, enjoy greater freedom and flexibility, create innovative products or services, all while ideally generating a handsome income. Similarly, investing in further education can unlock new skills, knowledge and expertise that are instrumental to securing a job that better aligns with your interests and values, help with your career progression and increase your earning potential.
  • Upside: An investment of this type can see you enjoying the benefits of personal growth and a more fulfilling career that aligns with your interests, passions and values. In addition, it sets the stage for potential strong financial returns on your investment, either through income you draw from your business or stronger negotiating power for salary expectations.
  • Downside: This strategy will require a significant time commitment from you, may require the investment of significant funds and like other investments, carries an element of financial risk with no guarantee of immediate returns.

In considering where to start or the combination of option/s that are right for you, evaluate how a particular investment strategy aligns with your current financial situation and goals, risk tolerance and time horizon. Importantly, you don’t have to go all in on one investment option: diversification is often a sensible way to manage risk and optimise returns. Whatever approach you settle on now, remember that strategies should not be static. Set time aside regularly to review and realign your investments as and when necessary to meet your evolving financial priorities.

Final Thoughts

As a woman, understanding how investing works is an essential piece of the puzzle to build long-term wealth and take control of your financial security. Tap into the power of investing to accelerate your wealth creation journey by leveraging regular contributions to achieve your financial objectives.

This information is intended to be of a general nature only and should not be treated as specific investment advice on any particular matter. You should seek professional advice that takes into account your own personal circumstances before making any financial decisions.