First-time investors usually try to understand a stock or fund when choosing what to buy. That’s important, but so too is understanding yourself, and your own goals.
Taking time to consider your capacity to invest, financial and life goals, time horizon and risk tolerance, as well as the level of support required, can potentially make a difference to long-term wealth creation outcomes.
Done well, some basic planning can help guide investors as they begin to construct and maintain a portfolio aligned to their needs and goals.
As Felicity Thomas, Senior Private Wealth Adviser at Shaw and Partners notes: “Before diving into the world of investing, it’s essential to pause and reflect on one’s financial goals, risk tolerance and the resources at one’s disposal.”
She adds: “By asking a series of important questions, investors can potentially create a solid foundation for their investment journey, helping to ensure that their strategies align with their personal circumstances and long-term objectives.”
Without such planning, new investors risk owning a portfolio of securities that don’t fit together or deliver the wrong outcomes. Instead of a well-constructed portfolio, they might be left with a hotchpotch of investment ideas.
Or course, no amount of planning or self-reflection can eliminate all investment risks. Even the best portfolios can lose money in falling markets.
Also, no checklist suits every investor or covers every question. An investor seeking capital growth over the next three years might ask different questions to another seeking income over 10 years.
Nevertheless, some questions are common to all first-time investors. For example, knowing why you are investing, how long you are investing for, your approach to investing and how much help you want.
ASX Investor Update asked investment experts to nominate questions they believe first-time investors should ask about themselves before buying shares, funds or other listed securities.
The experts include Future Generation CEO, Caroline Gurney; Stockspot CEO, Chris Brycki; Shaw and Partners’ Felicity Thomas; Morningstar Senior Investment Specialist, Shani Jayamanne; and VanEck Asia Pacific CEO, Arian Neiron.
Here are six questions the experts suggest:
1. Am I ready to invest?
Future Generation’s Caroline Gurney remembers having an unrealistic approach to investing when she started. “I was determined to invest as much as I could, so ended up putting far too much of my pay into the market each month. I couldn’t sustain that level of investing and meet my regular living expenses.”
Stockspot’s Chris Brycki suggests first-time investors consider their financial situation including debt on high-interest credit cards or personal loans before investing in the market and, ideally have an “emergency fund” equivalent to 3-6 months of their income, for unexpected bills.
Caroline Gurney, CEO, Future Generation
“Getting rid of bad debt that charges 10 per cent more in interest is more important at the start than investing, in my opinion,” Brycki says, “So, too, is sound budgeting and knowing one has surplus funds from their income to invest.”
Shaw and Partner’s Felicity Thomas says that in her view getting one’s financial situation under control is a foundation of good investing. “Before committing money to investments, investors should have a stable financial foundation. This includes having an emergency fund, manageable debt levels and a clear understanding of income and expenses. Without these basics in place, investors may find themselves in a difficult position if their investments do not perform as expected.”
2. What are my goals?
Morningstar’s Shani Jayamanne says she made mistakes when first investing. “I jumped into it by investing in managed funds that sounded great on paper, but I didn’t stop to consider my investment needs or whether the funds suited my goals. In the end, I had to sell the funds and rearrange everything in my portfolio.”
Shani Jayamanne, Senior Investment Specialist, Morningstar
For Jayamanne, the key is understanding one’s financial goals. She’s an advocate of Morningstar’s Goals-Based Investing approach which she considers to be helpful for people in building a foundation for their portfolio.
Morningstar describes Goals-Based Investing as the practice of “setting specific and challenging goals, prioritising them based on necessity and time horizon, and regularly measuring progress and making adjustments.” In Morningstar’s view, the focus is on maximising the probability of achieving the goals, rather than beating a [sharemarket] benchmark”.
For the purposes of this article, in the hypothetical example of a young couple investing for the first time, that couple might decide their goal is building a diversified portfolio of shares and listed funds worth $200,000 within 10 years, to provide a deposit to buy a house. The hypothetical couple hopes to have started a young family by then, so has considered their life and financial goals.
The next step, in Jayamanne’s view, is working backwards. “Once an investor has a financial goal, they need to understand how much they can invest each year and what type of annual return they need to get there.”
3. How long am I investing for?
In our hypothetical example, the couple may expect to invest for 10 years. Another investor might only want to invest for a few years before they need to use their funds. Others might invest for decades.
Understanding your investment timeframe is central to forming wealth goals. That’s why Compound Interest Calculators always ask how long one intends to invest. The longer the timeframe, the more time to compound returns and potentially build wealth.
Shaw and Partner’s Thomas suggests investors consider these questions: “What is my investment time horizon? When will I need to access the money I am investing? How does this timeframe impact my investment choices?”
Felicity Thomas, Senior Adviser, Shaw and Partners
4. What is my risk tolerance/capacity?
For many first-time investors, ”risk” is simply the risk of losing part or all of their capital.
Stockspot asks prospective clients to consider how they would feel if the sharemarket suddenly fell 10% or 20%. Would they panic and sell their investment? Or would they stick with their plan, knowing that markets can have occasional years of negative returns over longer periods?
Chris Brycki, CEO, Stockspot
“In my experience, people with less investing experience tend to get more worried by market falls,” says Brycki. “The risk is that they ‘capitulate’ at the bottom of market and possibly sell at the worst possible time, not realising that sharemarkets tend to rise over long periods.”
VanEck’s Arian Neiron says people investing in higher-risk stocks, such as ”meme” stocks promoted through social media, could ask: “What would happen if the stock fell more than 50%? Would I have to sell? How would that loss affect my financial situation? Could I recover financially?”
Neiron says some investors underestimate the pain of capital losses and uncertainty during market falls. “Although it’s good to ask these questions upfront, it’s not until you’ve experienced a large loss during a market crisis that an investor really learns about themselves and their discipline. In VanEck’s view, it can pay to use an independent financial adviser who can objectively make these decisions.”
Morningstar’s Shani Jayamanne suggests investors also consider their “risk capacity”. “Most conversations with first-time investors usually focus on risk tolerance: that is, how they would respond if the market fell a certain amount,” she says. “Also important is considering how much risk one needs to take to earn their required rate of return (their risk capacity) and if that level of risk suits them.”
Let’s return to the earlier hypothetical example where the couple wants to save $200,000 for a house deposit within 10 years. They plan to invest an initial $10,000 and then another $1,000 each month for the next 10 years. To get to their $200,000 target (before inflation, fees or tax) calculations indicate that they should aim for an annual return of 8%. They make these calculations using the Moneysmart Compound Interest Calculator.
Vanguard research shows that Australian shares returned an average 8.3% annually over 10 years to end-June 2023 [1]. So, to potentially achieve their goal of 8% return, the couple may consider the benefits and risks of investing in an ASX-quoted fund that provides broad exposure to Australian shares.
5. What level of support do I need?
Some first-time investors are excited about investing and eager to learn about companies and markets. They may soon realise that company research is complex and time-consuming and that investing requires good administration. Other investors are happy to do that work and can devote enough time to follow the market regularly.
For most investors, the choice is between a financial adviser, robo-advice service and doing it themselves. An investor who wants to be very hands-on might use an online broker. Another who wants an expert to do all the work for them might consider an adviser and pay higher fees. Other investors use online robo-advice services that provider automated advice at lower cost.
6. How much do I know about investing?
VanEck’s Arian Neiron says it’s human nature to overestimate one’s investment knowledge, particularly at the start. “We’ve all been there. An investor makes a successful investment and believes they are good at investing. It is not until you experience market crises and invest for decades that you realise, in hindsight, how little you knew at the start and how experience is such a great teacher.”
Future Generation’s Caroline Gurney suggests first-time investors commit to a process of lifelong learning about investing. “That doesn’t mean spending hours each week on your investments. Rather, it’s about saying, ‘If I’m going to start investing, then I’m going to take some time to learn about the basics of the market and spend some time monitoring my investments. Ultimately, the best way to learn about the market is by investing and following your portfolio.”
Arian Neiron, CEO, VanEck Asia Pacific
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[1] Vanguard, ‘2024 Vanguard Index Chart’. www.vanguard.com.au.
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