What Do I Invest in?

Investing has the potential to be the best financial decision you could make. Investing your hard-earned money allows you to accumulate wealth over time that you can use for your children's education, retirement or any other financial objective by setting up a well-managed investment portfolio.

While it’s generally accepted that investing is a wise decision, many people question where to start and what they should invest in. With that in mind, let's examine some of the more popular investment vehicles on the Australian Securities Exchange (ASX).

We'll discuss the pros and cons of each investment to help figure out if any of them fit into your ideal investment portfolio. We'll also highlight a few investments that you shouldn’t invest in.

Getting started: What investments should I consider?

Trading the ASX can appear a little intimidating initially, which explains why many find it challenging to get started. But with some knowledge and guidance, it is possible to make informed investment decisions once you understand some of the most common ways to invest your money.

 1. Shares

Shares, also known as stocks, are one of the more popular ways to invest in the stock market. They include publicly listed companies such as Commonwealth Bank (ASX: CBA) or BHP Billiton (ASX: BHP), as well as exchanged traded funds and managed funds. If you decide to trade individual stocks, I recommend you stick to the top 20 stocks on the ASX to gain confidence in buying and selling shares, as these are the most liquid investments in the stock market.

According to the 2023 Credit Suisse Global Investment Returns Yearbook, the Australian stock market has been the best performer in the world since 1900, producing an annualised return of 6.43 per cent. According to Morningstar, over the last 20 years to 30 June 2023, Australian large-capitalised stocks have returned an average of 9 per cent.

What does this mean?

To put this into perspective, if you had invested $10,000 in 2004 compounded at 9 per cent for 20 years, your investment would have grown to over $56,000, excluding any dividends from income. That's why Australian stocks have been such a popular investment, as you get to share in the capital growth and income of a company you own shares in.

If you are keen to start trading stocks and want to make consistently wise choices about which stocks to invest in, I encourage you to review my 10-step guide to share trading. It will give your confidence the boost it needs to get started.

2. Exchange-traded funds

Investing (either fully or partially) in exchange-traded funds (ETFs) or managed funds is an alternative if you're concerned about choosing individual stocks. It's also a low-cost way to invest in an index or commodity. For example, investing in an iShares S&P/ASX 20 index fund (ASX: ILC) will distribute your funds among the top 20 companies on the ASX that comprise that index. So, it won't be disastrous if a few companies underperform.

3. Managed funds

Investing in ETFs and managed funds is comparable as each fund creates a portfolio of stocks or other investments by pooling investors' money. The primary distinction is that ETFs are actively traded on a stock exchange, allowing you to purchase shares whenever the market trades.

On the other hand, buying or selling units in an unlisted managed fund on the ASX are less liquid than stocks, given that they are only priced once daily. It's a good idea to talk to your stock broker if you want to invest in managed funds via the ASX.

4. Real Estate

Investing in property is a great way to diversify your portfolio. While you can purchase real estate directly and be part of the great Australian dream, you can also invest in property funds (Real Estate Investment Trusts REITs) on the ASX.

These funds own a range of incoming-producing property assets that investors would not usually have exposure to, such as office towers, shopping malls, industrial buildings, hotels, and cinemas.

5. Bonds

While bonds (also known as fixed-income assets) are less popular with investors due to their complexities, they can be appealing as they offer a regular and reliable income stream. Corporate bonds issued by corporations are freely traded on the ASX.

The benefit of investing in bonds is that they offer to pay a defined income stream and to return your investment at face value on maturity. Given the complexities of these types of investments, it's a good idea to talk to your stock broker or a financial adviser before you invest directly. Alternatively, consider investing in a bond ETF.

What investments shouldn't you invest in when starting?

Two financial markets that tend to have a lot of appeal with beginners are highly leveraged markets, such as Forex and Contracts for Difference (CFDs) and cryptocurrencies. But are these markets safe, and is it something you should invest in when getting started?

Forex and CFD markets

Forex and CFD markets appeal to day traders as they are promoted as a quick way to make money. But would it surprise you to know that over 90 per cent of individuals who trade leveraged markets end up broke or, at best, break even? This occurs because traders can control larger positions by investing only a small amount of capital (as they borrow funds from the broker to top up their position).

So, while trading Forex and CFDs allows you to earn higher returns using a smaller initial outlay, it can magnify your losses if you get it wrong. As such, due to the high-risk nature of this market, I only recommend it if you have proven that you can profit consistently from trading stocks directly.

Cryptocurrencies

While cryptocurrencies are relatively new, they have grown in notoriety over the last decade, with the most popular examples being Bitcoin (BTC) and Ethereum (ETH). Crypto assets are digital assets commonly called coins or tokens that are stored in a digital wallet. As most cryptocurrencies are largely unregulated, they are considered to be very risky.

The price of cryptocurrencies is typically influenced by the media or social media hype, which is why they are prone to extreme fluctuations. Unfortunately, the number of cryptocurrency failures in recent years has meant that many investors have lost, in some cases, significant amounts of money, which is why they should be avoided at all costs.

Personally, I would rather have my money invested in large-cap blue chip stocks where I know I can make money and not worry whether my investments have dropped significantly in a matter of minutes or hours.

What is the best approach to investing in the ASX?

There is no fixed approach to trading the ASX, as everyone's financial goals are different, but there are some key factors to consider before you invest your hard-earned money.

1. Time frame to invest

Depending on what stage you are at in life can have a bearing on what you decide to invest in. For example, if you're in the wealth-building stage (typically 25-49 years), you would focus your investment portfolio on growth assets, such as shares, ETFs, real estate and bonds. However, if you're nearing retirement, consider shifting gears to invest in bonds and cash, such as term deposits.

2. Risk tolerance

The question you need to ask yourself is, what's your tolerance to risk? While shares have the potential to produce strong capital gains, they can be prone to fluctuate heavily in major market declines. This was evident during the Global Financial crisis and the recent COVID-19 low in March 2020.

If you don't need your money anytime soon and you're considering investing in growth assets, stocks, stock-based ETFs, and REITs are generally suitable options. Fixed-income investments, on the other hand, are generally more suitable if you're focused on capital preservation.

3. Amount to invest

The amount of disposable capital you can access will determine how you invest your money. You can start investing with as little as $1,000, although you will need to set up a savings plan to build up your capital. If you have more than $20,000 to invest, you will have more flexibility in diversifying your investment portfolio. Either way, the key is to get started, as the sooner you invest, the quicker you can start building your wealth.

4. Knowledge is the key to success

Investing in individual stocks is a great way to build wealth if you have the time and knowledge to do it well, as some investments require more knowledge than others before you put your money at risk. If not, investing in ETFs or managed funds also provides exposure to the stock market.

If you decide to invest in individual stocks, you will need to learn how to develop a trading plan to help you identify why you are trading and what you want to accomplish with your investment goals. A trading plan also provides the basis for your trading decisions, including your trading rules and the actions you need to take when making a profit or loss.

Next steps

If you're new to investing and keen to start, our Trading Mentor Course is packed with proven and tested trading strategies. If you've already started building an investment portfolio but are looking for techniques to turn you into a successful trader, the Short Course in Share Trading will take your trading to another level.

Dale Gillham is one of Australia's most respected analysts with over 30 years of experience in the investment industry, including banking, financial planning, share market education and professional trading. He is the best-selling author of multiple books, and is passionate about ensuring clients receive the highest level of education in the stock market with with our share market trading course.