Now that you are confident you have surplus money to invest and a system in place to do this, the next question is where to place it and for how long?

It will be easier if you have a goal for your savings. It could be to provide a comfortable retirement, for that long dreamt about holiday or for your children's education. Having a goal will help keep you motivated. The goal will also help to determine the time frame. A hint, for a short term goal you want security and minimal risk so cash investments are good like term deposits or online accounts. Medium to long term goals you can start investing in managed funds, shares & property.

Should you see a financial advisor?

The rules these days regarding advice are quite strict. We are bombarded with information about going to see a financial advisor. Yes a financial advisor does have to complete certain courses to be registered. What we don't know is what success they have had in investing? In some cases financial advisors don't invest at all!

They generally are licensed through a registered investment firm who has a range of managed investments to offer. They won't usually discuss direct investment into property or shares. So you can see, even though they are financial advisers they can't meet the needs of everyone.

The first step in investing is to work out where you want to invest.

Some people like property because they can see it and understand it. While others don't like property because of the costs and time frame to buy and sell not to mention ongoing maintenance.  

Others like direct share investment because it is generally easy and quick to buy and sell shares with low transfer costs. Others don't like shares because they are unable to assess what to buy and afraid of the large price fluctuations that can occur.  

The major strength of cash type investments strength is their ease to invest, withdraw and consistent returns. The downside is their long term return is generally less than the other investment options and may not keep up with inflation.

Managed funds (Mutual Funds) are popular because small amounts can be invested with regular instalments via an automatic payment. They also invest in all the asset classes. This allows people to invest in areas where they normally wouldn't due to the high costs, such as commercial property and international shares. Managed funds are often the first choice these days for new investors looking to invest for the medium to long term.

The hard choice for many people after deciding which type of investment they prefer is the actual investment itself. Under current legislation of the Financial Services Reform Act in Australia only financial planners are allowed to advise where people are to invest their money.

Traditional advisors like Accountants generally can work through what type of investment would best suit you and provide advice on the tax implications.

We will therefore go through each type of investment and how to find the assistance you need to invest.

Other types of investments you might come across are share options, warrants, and others you may not have heard before. These investments are more complicated, have greater risks, and are only recommended for experienced investors.

Cash Accounts

There aren't any advisors around who will provide advice on small amounts of money. If you have high disposable income or are very wealthy various banks have relationship managers to provide advice on their particular products. Failing that self education is the key. One way is to do the rounds of the various banks looking for the product that has the rate and terms you want. Another way is reading appropriate magazines like "Money" or visiting an independent comparison web site. They provides data on numerous investments and allows you to compare.

Just one word of caution, Banks, Building Societies and Credit Unions can fail and when they do depositors often lose all their money. Pyramid Building Society in Victoria was probably the last failure in Australia and that was almost 15 years ago. Some people lost most of their life savings and received only some it back over the following 10 years. The traditional rule of thumb is the higher the return the higher the risk. The smaller organizations have to offer better rates to attract your business.

Residential Property Investment

To find out more information please see the houses section. The whole section is important and should be read and understood thoroughly before a decision is made.

We have not covered commercial property investment such as retail shops, offices and industrial properties. The reason is most people who have these type of investments cut their teeth in residential property and as their knowledge grows, branched out into other forms of investment. This may be something for you to consider in the future.

Direct Share Investment

Investment in this area has never been as popular as it is today. Technology has reduced the cost in buying and selling so that it is now very cheap. The institutions that provide this service  also generally provide some information to help investors make a decision on which shares to buy.

There are 2 options either do it yourself or ask an expert. Stockbrokers used to be willing to help those with small amounts knowing that over time you may become a large investor. It used to be almost impossible to invest directly anyhow so you really had no choice. The ability to provide advice on smaller amounts was covered by the higher transaction fees that were then in place. Now advice is mainly reserved for large investors or for those prepared to pay higher transaction fees.

How do you invest then?

Our recommendation is to talk to others who have invested in shares through the good and bad times. If you have a desire to invest in shares then self education is the key. If you're not prepared to do the work, then you should consider managed funds.   

First of all read as much as you can. The idea is to understand much about the world of business, different industries and different companies in those industries. Sounds boring? For some people, yes! In that case seek professional advice if you still want to invest in the share market. For others read on.

To self educate start off by reading share magazines like Smart Investor. Business sections of newspapers as well as stock broking sites often have company & industry data. Talk to fellow investors or join a share club. By continually learning you should find yourself knowledgeable enough to make your own decisions in what to invest in.

Be very reluctant to solely take advice from so called share investors. There are plenty around however most are relatively inexperienced. The simplicity in buying and selling shares today means there are so called experts everywhere all willing to provide their advice of the next sure thing. The only investors worth talking to are those who are successful and have been in the game for at least 20 years, through the 1987 stock market crash and 2000 technology stocks crash!

In the Autumn of 1929, a shoe-shine boy asked Joe Kennedy (Stock Market Investor and father of future U.S. President John F Kennedy) to recommend some shares.  The story goes that the next day Joe sold all his shares.  And then the market crashed.  Joe figured if everyone wanted into something, it was time to get out!

Managed Funds (Mutual Funds)

Managed funds have grown in value in Australia from approximately $60 billion in the mid 1980's to well over $500 billion by 2000.

Managed funds work by pooling your money with others. Your small amount of money buys part of an entire portfolio of investments. It enables you to be involved in investments that on your own, you would not be able to buy, but collectively with others you can.

Managed funds employ experienced people to make the day to day decisions about what to do with the money at hand.

Managed funds invest in:   

Cash   

Fixed Interest Securities   

Property (Commercial and large residential developments)

Domestic Shares

International Shares

Each of these types of investments is an asset class.

The 2 most common ways people invest in managed funds is either directly (from the fund itself or through a supplier of funds without advice, usually via the internet). The 2nd way is through a financial planner.

Advantages of managed funds are:

Investments can be spread over different asset classes ie shares, property, cash and fixed interest. This provides diversification which lowers the risk and allows you to invest in investments that on your own, you wouldn't be able to invest in.

The cost of investment is reduced as it is spread across the whole fund.

Fund Managers are experienced in the industry and paid to get a better return than what you could do yourself (doesn't always happen though).

Your investment is usually able to be withdrawn quickly and with minimum of effort.

Disadvantages of managed funds are: You have no control over where the money is invested once you have deposited your money into a fund.

Unlike direct property investments you can't use managed funds as security for traditional loans. Margin lending can enable you to invest more in managed funds. This loan facility is not for the feint hearted and only for the experienced investor.

The fees at times can be considered hefty particularly if the fund is not performing.

How can you work out which suits you best? It is very difficult and involves a great deal of research. There is a way to overcome the confusion and that is put your savings into a fund that invests in a number of other funds that have different investment strategies. These are becoming more and more popular and are given names like multi manager funds and manage the managers. Another option is an index fund.

Read magazines that have information about these funds is the best place to start.

The question now most often asked is should I invest direct or go through a financial planner?

The answer usually refers to how much money you have to invest. Financial planners are paid either by the investor for their time or via the fund managers which the investors pay via higher fees. It seems pretty difficult to see a planner if you have anything under $20,000 to invest. Any more than that it is probably worth seeing a financial planner (see our section finding a financial planner). One of the advantages of investing direct is the lower fee structure.

If you fall in that category of not having enough money to see a financial planner or would like to do it yourself, how do you go about it? It gets down to research with most of it being able to be done on the internet. Unlike shares where there is constant information on which to buy, sell or hold, the information on managed funds is harder to find.

It's also a good idea to obtain copies of different product disclosure statements. These can be obtained from various financial institutions either by visiting in person, telephone or web sites. By obtaining say 5 of these booklets from different fund managers, you will be provided with valuable information to assist with your financial education.

Don't forget the advantages of compound interest. With managed funds the dividends and profits on sale of various investments are reinvested back into the funds. This combined with regular deposits via automatic investment plans can see your investment flourish!