Where should I invest my money?
This is a reoccurring question that investors face when looking to invest in the share market. Is the investment going to provide them with the return they desire at a comfortable level of risk? I will uncover the steps you need to take in order to make smart share investment decisions. This will assist you in determining how to invest your money in the share market. If you would like an introduction to financial independence have a read of the Wage Investor FIRE Guide.
1. Create a share market financial plan
Making a choice that you want to invest your money to generate higher returns is the easy part. Deciding when, where, and how that money will be allocated requires a more in-depth approach. Starting out as a new investor can be overwhelming as the choices are endless. Creating a financial plan may clarify the process when investing in the share market. There are many investment options to choose from including:
- Equities (shares)
- Fixed income securities (bonds)
- Exchange-Traded Funds (ETF)
- Listed Investment Companies (LIC)
- Real Estate Investment Trust (REIT)
- Contract for Difference (CFD)
- Financial Derivates
- Commodities
- Currencies (including Cryptocurrency)
The decisions you make in your financial plan all come down to the risk/return profile you would like to adopt. You should factor in the time horizon you plan to invest your money in. A goal to grow your capital base or build passive income can impact your investing decisions. To answer these questions you should consider doing your own research. Subscribing to membership such as The Motley Fool, Rask Australia, or Eureka Report can provide a differing opinion of advice and investing strategies. These memberships will generally come at an annual cost therefore carefully consider if they will be suited to your individual circumstances. This can sometimes lead to an overload of information. Sharesight can allow you to track and automate the record keeping of investment movements. By signing up using the Sharesight link, you can even get 10% off the cost of the premium subscription cost. This is a software investment tracker. So if you are still unsure, it’s best to speak with a licensed financial advisor that could assist you further.
2. Do your own research on the share market
The crucial step in all investment decisions is doing your research and due diligence to evaluate a share investment. This will ensure that you are clear about the risk level and returns that the investment offers. Undertaking stock analysis by becoming your own technical analyst involves researching past trading patterns, price movements, and trading volume. The goal of reviewing the performance is to predict future price fluctuations. Self-education through market analysis tools such as Commsec’s Market News or Simple Wall Street can assist with this process.
The following research tips are suggested to make the right share investment decisions for your financial future:
- Conduct Fundamental analysis to analyse financial statements and determine the financial health and intrinsic value (what the share is worth) of a company.
- Research quantitate and qualitative measures such as revenue, profit, and brand recognition to measure a companies performance.
- Review performance metrics for example Price to Earnings ratio (PE ratio) to paint a picture of what investors are willing to pay. These ratios should not be used in isolation to predict future earnings.
- Speak to an expert if you are time-poor and would prefer someone else to do all the hard work for you (it will come at a cost though).
3. Assess share market conditions
A consideration of the external factors impacting the share market can play an important role in the performance of your share investment portfolio. This was all too apparent with the onset of COVID-19. The pandemic that struck the world also shook the share markets in March 2020 wiping billions off within days. Investors that were seeking to make a quick dollar in these times of volatility had to be very cautious of an imperfect market. Day traders were speculating and take a short/long position to trade. The aim of this strategy was to use market momentum swings to maximise their short-term returns. Timing the market is a far riskier approach as the market does not always fall in the investor’s favor. Investing when there is widespread uncertainty causes greater volatility in the short term.
If in-depth market research seems all too hard that’s ok, not everyone is cut out to be a financial analyst. Most people don’t have the time to spend hours in front of the computer interpreting financial statements, excel worksheets, and price charts. This is where you outsource the work to someone who does such as a financial advisor. You can engage these experts and lean on their knowledge to make smarter investment decisions in the future.
4. Avoid the hype
There are also going to be share spruikers on social media that try to scam amateur investors new to the market. These people provide unsolicited financial advice in an attempt to manipulate the share price of a company. This is evident through the gamification of shares using a zero commission “pump and dump” trading strategy. These investors sell a share as soon as they believe that the share price is overvalued. The losers in this scenario are not the spruikers who make their money by getting in early. Poor inexperienced individual investors that chose to invest at the peak of the market end up taking the loss. Social media is used to gain a following and convince others via online posts of “market trends”. Rather than leaving investors to do their own research into the company.
GameStop Corp.
The perfect example of people getting caught up in the trading frenzy hype hoping to make a quick return on their investment. The American video game company’s financials predicted a slow and steady growth forecast. This however didn’t stop investors flocking to pump up the stock price and short squeeze the hedge fund managers.
Websites such as Reddit’s WallStreetBets platform with over 8 million followers convinced other members to keep investing. The issue was that the vast difference in the true market price (intrinsic value) and market value of the company. The share rose from $20 to $483 within the space of two weeks in January 2021. This meteoric rise came before it plummeted to $50 per share within the week following. This is a cautionary tale to investors new to the market chase quick returns. Investors must be wary of these tactics taking investment advice from social media groups. Trending stocks promoted on social media may have greater market volatility and instability as traders speculate on the future share price.
5. Invest for long-term returns
Investing in companies with solid management teams and consistent profitability can improve prospects of quantifiable future growth. This growth potential can be measured through market research. Identifying trading opportunities through a statistical analysis enables the best price to be estimated. The practice also identifies any key events that may impact the underlying market conditions. Undertaking in-depth technical analysis of companies that perform well over time can improve the likelihood of a more stable and profitable portfolio. Furthermore, to learn more about investing in the share market read The Warren Buffet Way. This investing book explores the investment strategies of Warren Buffet one of the greatest long-term investors in history.
Investors may like to compare alternative investment approaches such as timing the market as a genuine trading strategy. Those investors seek to use technical principles to manage their trading position. For instance, the cryptocurrency market is highly volatile making it an attractive option for investors seeking short-term gains. Timing the entry and employing an exit strategy is essential to be a successful day trader. I personally prefer a more conservative and passive approach when investing in the share market. The Pearler investment platform allows me to dollar cost average into the share market to work towards reaching my financial goals. History shows us that adopting a more passive approach such as the buy and hold strategy can offer long-term returns to shareholders. Therefore, investors may not reap the greatest short-term returns but can enjoy compounding returns and capital growth over time.
Summary
The share market is not always consistent and historical data is not the sole metric for predicting future returns. Therefore, whatever method that you choose to invest your money, be wary of blindly following viral videos on social media. Platforms such as TikTok offering the next big thing should raise some red flags. Most importantly, do your own research first and invest in a more secure financial future to achieve your financial independence. If you are considering entering the US share market have a read of the review on Stake the US share trading platform. You could even score yourself a free share!
