How to Invest Your Money Like a Professional

Few of us are taught anything about of money when we are young, such as the magic of compound interest or the dangers of debt, so it is not surprising that investing is a mystery to most people. This is one reason there are so many dodgy spruikers offering "get rich quick schemes", and why they do so well.

The future starts now

Bamboozle

You can learn how to become rich just by waking and breathing the air each morning. If you follow some simple steps - and avoid the trap of falling into debt - your future wealth is (almost) guaranteed.

4 steps to financial freedom

Here we set out in four easy to understand steps all you need to know about creating wealth the tried and trusted way.

Why investing is for the long term

For most people, the focus of investing is the stock market. After all, this is historically where most wealth has been created. But the spotlight on rising and falling stocks can create the illusion that stocks must be constantly bought and sold according to their day-to-day value. Wrong. Like most wise investments, the true value of stocks lies in their long-term performance.

Risk vs Return

Essentially, investing is putting your money into an asset which offers a financial return. There are only two ways to make money out of an asset: via the income it generates or by the asset increasing in value. The best assets (shares and to a lesser degree property) combine both of these. Others, such as gold, art and antiques often increase in value but generally offer no cash income.

Assets are divided into classes according to their returns. The rule of thumb is the higher the risk of the asset, the higher the return.

Classifying assets according to the risks and returns:

Cash: The safest way to store your cash is in an interest bearing savings account. The asset is protected and the risk is low, which is why the return is also low - but not always. In times of high interest rates and falling stock and property markets (like the present), cash is often a top performer.

Property: A house or office building generates income via rent, but you can also make money from its appreciating value. The risk is higher, the property market could crash or your tenants might trash the joint, so the rewards are higher.

Bonds:Shares: The sexiest of the lot, because the returns are traditionally the highest. The company in which you buy shares will share its profits with you, by issuing a regular dividend. The share value will increase (or fall) as the company's fortunes change. Shares go up and down all the time, thus the high risk, but the historical trend is that markets rise over the long term, which - you guessed it - means a higher reward.

Let the experts look after your investments - why you should go with a managed fund

1. They take the worry out of investing.
2. They let you diversify your investments, so you spread your risk. Diversification means putting your eggs in more than one basket. Different asset classes (shares, bonds, property etc) perform differently over time.
3. They allow you to invest your money a little at a time.

Fund managers are happy to take your money in installments as small as 00. As you add to your investment your money will start to grow. Getting rich won't happen overnight, but it will happen.

Different types of managed funds

Shopping for a fund can be like walking into Bunnings, there's just a wide range to choose from. Whatever floats your boat, there's bound to be a fund for you.

There are three main types of managed funds: retail, listed investment companies (LICs) and index funds.

Retail managed funds: There are many of these funds, in which you buy units rather than individual shares. When you've narrowed your search, get stuck into the prospectuses and product disclosure statements to make your pick.

Listed investment companies: These operate much like retail managed funds, but instead of buying units, you buy shares that trade on the stock exchange. This means you have to buy and sell through a stockbroker, but online brokers can reduce your fees. Their greatest advantage is that some of the largest and most reliable LICs have very low fees. For example, one of the biggest, the Australian Foundation Investment Company, has an MER of about 0.13 per cent, which leaves most other funds for dust. Unlike retails managed funds, they don't offer a savings program. One way around this is to set up an online broking account which, together with the broker's high-yielding savings account, will set you on your way.

Index funds: Price is the main advantage of index funds. They operate by investing in an index of say, the top 200, 100 or 50 companies. For that reason there are no highly paid fund managers to pick stocks - it's all done by the market. Their great advantage is that they always pay what the market pays, which, as we've seen, is a solid return over time. Also, they offer great diversification. For a tiny investment you can have a share in all 200 of Australia's top companies. On the downside, some of the best funds have fairly high entry levels, around 00.

Things to watch out for when picking a fund manager. Concentrate on three standout features:

1. Asset classes the fund invests in Bonus points for a fund that allocates a portion of its investments overseas. After all, big as it is in land mass, our island country constitutes only 2 per cent of the world economy.

2. Fees If you are referred to a fund by a financial planner he will inevitably charge a fee, which is passed on to you. Then there will be entry and exit fees, and ongoing fees, often called management expense ratio payments (MER). All these vary considerably and add up over time. Pay close attention to the fees each fund charges. Entry and exit fees vary by as much as zero to 5 per cent. MERs can vary from 0.75 per cent to 2.2 per cent or more. Typically, the MER is higher for shares (high risk) than it is for cash (low risk). Some funds also have performance fees, where they are paid a bonus for exceeding a set return, and buy/sell fees. The only way to check and compare is the offer document for the fund. Read it very carefully.

3. Performance Examine the fund's prospectus or PDS. These can be dense and complicated documents, but it's worth taking the time to poke through them. The best prospectuses are those that are clear and concise and attempt to educate investors. The worst ones are easy to pick: they try to bamboozle you with complex formulas.

How to Invest Your Money Like a Professional

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