Diversification
Yes, the old saying “don’t put all your eggs in one basket” actually works. To reduce your risk, you can invest in different asset classes such as Australian shares and properties. For example, when the ASX 200 dropped by 35% from Oct 2007 to Oct 2008, the value of your investment portfolio might have only decreased by 5% because your investments in other asset classes were not affected as much. However, if you don’t like certain asset classes, don’t just invest for the sake of investing. You can also diversify within the same asset class. If you prefer Australian shares, you can diversify by investing in different sectors such as financials, resources and infrastructure.
Capital protected products
If you are conservative about investing, are scared that you are going to lose all, or just simply want to manage the risk of your portfolio, then you can try capital protected investments. The capital protection varies from product to product. If the capital is 100% protected, then at the end of the investment term, you can get at least back what you invested. Sounds too good to be true? The management fee may be a little bit higher than a normal investment, but that is the “insurance premium” you pay to minimize downside risk.
Entry fee / contribution fee
Talking about fees… There are some fees that you can minimize. Some investments charge a percentage on every dollar you invest as an entry fee. This tip can save you hundreds or thousands of dollars instantly. It is as easy as applying for the investments through a financial adviser, and then negotiate for the fees to be rebated back to you (doesn’t normally work if you apply directly from the fund managers).
If you are like most people who never look through their superannuation member statements, then you might not know that your super fund may charge a 4.5% contribution fee. 4.5% is a random figure we picked for illustration purposes, but you get the point. If you can’t eliminate the contribution fee, consider changing to another super fund with lower fees.
Hidden MERs
Management fees (i.e. MER) are deducted from the performance of your investments to compensate fund managers for managing individual investment. They are investment specific. Without you noticing, MERs are already taken off from your returns. Retail investments can have a MER up to 3% and it is charged on top of the admin fees you already pay. Wholesale investments normally have a MER below 1%. MERs are often not disclosed or made clear to you. But a couple of percent difference in fees can make a big difference in your returns. Always ask for the MER of the investment and compare with other investments.
Make rational not emotional decisions
Buy low, sell high seems to be a straight forward concept. However, when the market goes up, everyone wants to cash in, and most investors only get into the market when the price is high.
On the other hand, when the market goes down, most people panic and want to cash out. Even if they don’t need the cash, quite a lot of people sell at the bottom of the market and suffer a huge loss. When the market picks up again, they lose the recovery opportunity.
Think of your investment objectives, don’t just follow others and make decisions that make sense.
Hope these tips give you a head start in investing. They are generic guidelines and thus need to be adapted to your individual situation. For more insightful information, remember to check our monthly tip update.
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