I currently have approximately $45,000 across a couple of savings accounts, gaining minimal interest, and my goal is to purchase a house or apartment within the next 5 years. I would like to invest a small amount (for example $5,000 to $10,000) to start with, to increase my future home deposit. What are the best ways for a beginner to invest (that are not too high-risk)?
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Thanks Elo B for your question. I agree that savings accounts in Australia pay very low interest, and this can make it difficult for your funds to gain momentum. After allowing for inflation and tax, savings account returns are almost trivial in the prevailing interest rate environment.
The key components to answering your question are:
- Your time horizon: exactly how long will it be until you want or need the funds?
- Your risk tolerance: what level of investment risk are you willing to accept, in exchange for the potential of a higher return?
You mention that you would like to purchase a property sometime within the next 5 years. This provides some guidance, however you need to be clear that if you elect to purchase an investment where returns are not guaranteed, then there is some risk that you will have a negative return and can lose capital. The important point here is that investment markets do not move in a straight line. That said, the longer you hold an investment within the primary investment sectors (e.g. equity, property and fixed interest securities), the greater the potential for a positive outcome.
While there is a great deal of science behind defining the risk tolerance of an investor, one of the most important questions you need to ask yourself is ‘How would I react to an investment portfolio that lost value over a short period of time?’ Essentially your options are:
- Do nothing;
- Sell the investment and take the losses;
- Add more capital;
There is no "right" or "wrong" answer here. This question is simply designed, in order for you to begin to build a profile for yourself of how you would most likely behave.
Okay, so what to do?
If I were you, I would be inclined to invest a lump sum (and then if possible, a smaller amount on a regular monthly basis) into a diversified managed fund. This will provide you with an exposure to the main asset classes, thereby reducing overall risk. In this way, the fund manager you select will be making the buying and selling decisions on your behalf. While they do not get everything right, professional managers are likely to make less mistakes than amateur investors.
Look into the providers of Australia-based diversified funds. Try to build an understanding of their investment process, the experience of their people and their performance history. And then, once you elect to make an investment, be patient, reinvest your distributions, and above all, maintain your strategy. Good returns can take time to emerge.
There are several providers in this space, but as a starting point, have a look at:
- Colonial First State
- MLC and
Hope that this helps.
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