One of the fundamentals of investing is to make sure that you’re meeting your financial goals, and the type of investment product suits your individual needs.
Because no one can guarantee the performance of any investment, it’s important to remember there are always risks and losing money will always remain a possibility.
So what are the key things to remember when entering into a new investment? Your Money Magazine answers your questions.
According to the Australian Securities and Investments Commission (ASIC), when it comes time to evaluate the risk of an investment, the rate of return is not the only measure of how risky an investment may be.
ASIC’s key tips to investors are:
- ‘High return means high risk’ is a familiar rule of thumb. Some investments, even if they seem to offer relatively moderate returns, can be extremely risky.
- Take the time and do your research before deciding on an investment product. ASIC’s MoneySmart website is good place to start for guidance.
- Do your research. One of the best places to start is by reading the prospectus of an investment. This is the document which describes the financial security of an investment to potential buyers. It commonly provides material information about a company’s business, including:
- Mutual funds
- Bonds and other investments
- Financial statements
- Biographies of officers and directors
- Detailed information about their compensation obligations
- Any litigation that is currently taking place
- A list of material properties
- Any other relevant material information
- Although it’s advisable to read the prospectus in full, even if you read nothing else, ensure you read the sections that:
- Explain the key features and risks of the investment
- Explain certain indicators or ‘benchmarks’ that can help you assess the risks of unlisted debentures and unsecured notes, for example.
- You are taking a big risk if you put all your money into one investment. Spreading your money between different investment types (‘diversification’) reduces the risk of losing everything.
- Never rush into an investment. Take time to think through the benefits and risks, and always consider seeking professional advice from a licensed advisor. Related article: How to find good advice
- After completing your research on the level of risk, make your decision on whether you’re ready to invest your money. Remember to ask yourself, how would you fair if you lost what you’re putting in?