1. Consider your personal and financial goals
Consider your personal and financial goals – long and short term – and set your objectives. Think about the return you want and identify how much risk is necessary to achieve your objectives.
2. Determine your investment goals
Your investment goals will determine whether you want your investment to provide either capital growth or income or a combination of both. Some assets will give you income paid as interest and some will provide capital growth.
3. Identify your investment profile
Your investment profile will help you understand your tolerance for risk. For example, do you want to risk a possible negative or low return in some years for the benefit of higher returns in the long run? Or are you very cautious and want to guarantee the security of your money?
If you understand your risk tolerance, this will guide you to the investment plan best suited to your needs.
4. Decide on your time frame
Once you understand your goals and risk tolerance, you need to decide on your time frame for achieving your various investment goals.
For example, high returns gained over a long period of time may not achieve your short-term goals, even if your risk tolerance is high.
Time frames may be classified as follows:
| Short term |
Up to three years |
| Medium term |
Three years or more |
| Long term |
Five years or more |
You must ensure you have time to ride out any volatility that occurs, and withdraw from an investment at the optimum time – this will not necessarily be the time that you actually require your money.
5. Diversify your investments
Most investors know that at any point in time, some types of assets will provide better returns than others. This is because different types of assets respond in different ways to changes in markets.
When you diversify your investments, you spread your money over a number and variety of assets. This enables you to reduce risk as you smooth out the effects of movements in markets and achieve more stable returns over time.
AustralianSuper helps you diversify by offering a range of investment options, including pre-mixed investment options through the AustralianSuper diversified and asset-specific options.
6. Understand the factors that affect the market
There are many different factors that can affect the amount of growth an investment achieves and the risk associated with that growth, including:
- Interest rates
- Inflation
- Local and global economic developments
- Government decisions and market expectations
- Market perceptions and trends
- External forces, such as natural disasters, or even the 11 September 2001 terrorist attacks, for example.
These factors may be positive for one asset class and negative for another.
7. Invest regularly rather than 'time' the market
Investing on a regular basis over a long period of time – regardless of what the market is doing – is another form of risk management for long-term investments. It avoids seeking to time the market; that is, trying to predict the best times to buy or sell.
By investing regularly over time, you will pay the average investment price – not the peak or lowest price – and this will determine your overall return.
It is important to expect some years of negative returns; however, only if you sell at this point will you realise the lesser value.
Generally, the longer the period of time you are invested, the greater the impact on the growth of your investment.