Making Your Money Work

You can invest your personal savings in many ways, and you may not want to put all your spare cash into superannuation. Here are some tips about a large and complex subject.

For steps to choosing the right financial adviser, use the Getting Advice e- learning course

Before you invest, read more on ASIC's consumer website FIDO, in personal finance columns and investment magazines, and in books by licensed Australian advisers.

It can also be worth getting initial advice even if you intend to start small. Centrelink's Financial Information Service can give you information about investments face-to-face, though they can't recommend particular financial products.

When do you start?

Start now, no matter how small the amount you have. The longer your investment has to grow, the better the results. Even if you can't afford to invest a large amount, you may be able to start a small but regular investing program.

Investors	What they plan	What they hope to achieve in 10 years*
Nat and Sam	$500 at the start and $150 each month. (Total investment $18,350)	About $25,500
Greg	$10,000 at the start and nothing more	About $17,000

*Based on earning 6% each year after fees and taxes, and reinvesting their investment earnings.

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Above are two examples showing how Nat and Sam hope to invest, compared with their friend Greg who can afford to invest a lump sum now.

What do you invest in?

That depends on:

• how long you can invest the money for,
• and how comfortable you feel about different investments.

Investments are usually divided into two main types: income and growth. Income investments like cash management trusts and government bonds give you an income from earning interest, but usually little or no capital growth - your original investment doesn't increase in value. Growth investments like shares or property may give you capital growth over the long term, so that, as well as earning income, your original investment may increase in value.

Investment time frames and appropriate investment choices

How long can you spare the money?	Common investment choices
6 months to 2 years	Aim to earn interest with little risk, for example in term deposits and cash management accounts
2 to 5 years	Aim to earn mainly interest, possibly adding some growth assets, such as property and shares
5 years or more	Aim for capital growth as well as income by including more shares and property

How can you invest?

You can make your own investments directly, which gives you control of all the decisions. That means working out your own investment strategy, and keeping up to date with your investments and what's happening in the market through company annual reports and the financial media.

You can also invest indirectly through managed funds. Your money is pooled with money from other investors, and a professional manager makes the decisions for all the investors. You don't have to worry about day-to-day investment decisions, but you do pay fees for the manager's services. Do still read your fund's annual report. Either way, you might still seek advice from a licensed advisory business.

You can reduce risk by investing small amounts regularly and spreading your investments.

How can you manage risk?

All investment involves some risk, but you can reduce it by:

• investing in small amounts regularly to reduce the risk of investing everything just before the market drops
• spreading your money across different kinds of investment choices (such as shares, property and cash) to reduce the risk of being in the wrong market at the wrong time
• spreading your money among shares in different companies, different properties and different industries to reduce the risk of losing heavily on a single investment. (Some managed funds can do this more easily than trying to do it yourself.)
• dividing your money between two or three fund managers to reduce the risk of picking just one that's about to perform poorly.

How can you cut costs?

Fees, especially ongoing fees charged as a percentage of your investment, can make a big difference to what you earn. Always make sure you know what fees are charged before you make an investment. (Some investment arrangements, such as 'master trusts' and 'wrap accounts', may offer extra features and services, but make sure you will actually use them, otherwise you could pay extra fees for nothing.) See our comments on fees in the superannuation section.

What returns are realistic?

For a general idea, compare any investment with what's happening in the overall market. Returns vary considerably from year to year, so look at performance over as long a period as possible. Over 5-7 years, it may be realistic to expect returns that average about 7% to 9% a year from growth assets such as property and shares. Income investments may keep pace or do very slightly better than inflation, say about 4-6% a year, depending on the risk involved. If you are offered returns even 1-2% above current market rates, you are likely to be taking a much higher risk in investing. Anything above 15% would be very high risk indeed, possibly even a scam.

REMEMBER: If it sounds too good to be true, it's probably a lie.

What if the market falls?

The market value of investments rises and falls. Falls occur regularly and may present good opportunities for bargain buying. Markets generally recover, but they can take time. It's important to set your goals and your time frames and stick with them, rather than worry about every change in the market.

Should you borrow to invest?

Once you get your budget, insurance and superannuation savings in place, you might consider borrowing to invest. Borrowing to invest increases the amount of money you have to invest. That means either increasing your gains or your losses. It is a more risky strategy, so weigh up if you'll feel comfortable and consider your own financial strengths and weaknesses:

• Will you be able to manage the debt even if your investments perform poorly?
• Do you have a reliable income with a safety net of cash and insurance?
• Is your savings history and financial position strong?
• Could you handle increased interest rates or market downturns?
• Have you invested in this sort of asset before and understand its risks?

How do you avoid big mistakes?

Do what's right for you, and don't let others pressure you into something that makes you feel uneasy. Steer clear of 'all or nothing' gambles, 'get rich quick' schemes and high-priced financial gurus with the 'secrets of unbelievable wealth'. Most are a waste of money or outright frauds.

More information? Use FIDO's managed fund fee calculator, get a free copy of ASIC's Getting Advice. Read about different products on various fund managers' websites.

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