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How to be a successful investor in 15 steps | Updated: 5:36:36 PM, Thursday March 29, 2012
By Trish Power How to be a successful investor in 15 steps

You don’t necessarily need a lot of money to begin investing but a successful investor does need to follow some well understood steps.

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Investing is easy to learn although it can take years to master because it involves looking into the future. Even the investment experts cannot accurately predict what is going to happen in the investment markets, but some investment experts do earn a lot of money trying to forecast the financial future. In some cases, they get it right, and in many cases they don’t get it right.

Unless you have a crystal ball, an investor needs to manage the risk of uncertainty, and to purchase a spread of assets to allow for the ups and downs of different investments and different investment markets. The absolute essential ingredient to successful investing is to know why you’re investing and where you want to end up financially.

You don’t necessarily need a bucket of money to begin investing but you do need to have a clear intention to invest, and a successful investor has usually trodden the well-worn path set out in the 15 steps below.

Step 1: Be willing to learn about investing

Visiting our website is an excellent entry into the world of investing.

Step 2: Ask: why are you investing?

Anyone considering investing their money is hoping to achieve one or more of the following outcomes:

  • Protect the purchasing power of their money over time
  • Accumulate wealth
  • Generate a regular income from assets.

Depending on your stage in life, you may have some short-term investment goals and some long-term investment goals. Whatever these goals may be you need to think about them carefully before you start investing. For example, if you’re saving for a house and expecting to purchase the house within 3 years, then investing in shares to help build your home deposit is a fairly risky proposition. If your timeframe is closer to 7 years, then using the sharemarket to help grow a home deposit is not unrealistic, notwithstanding the sharemarket can have quite regular ups and downs.

If you’re investing now to supplement your superannuation in retirement, then depending on your age, you are likely to have a very clear timeframe (the age you retire) and most likely a sizeable investment target (enough to finance your years in retirement, and perhaps leave money to the next generation) (see Step 7).

Step 3: Getting started

In most cases, the major obstacle to becoming a successful investor is simply getting started. Thinking about investing is a process and some individuals take longer than others to begin a project or embark on a new stage in life.

Everyone is different and you have to respect the process. Even so, ‘getting started’ is a significant and compulsory step; even if, for some, that means simply redirecting your money to a high-interest bank account (see Step 4).

Step 4: Saving money is a great start

You save money when you earn more than you spend, or conversely, when you spend less than you earn. If you’re saving money you may have that money sitting in your everyday bank account with little or no interest. You have worked hard for that money and investing enables that money to now work hard for you. Even if you’re not quite ready to seriously embark on the journey of investing, a simple and quick way to ensure that your savings work for you can be to redirect those savings to a high-interest bank account. Hey, that’s an investment decision and now your money is working for you!

Step 5: Understand the relationship between risk and return – boring but essential!

Generally speaking, the higher the return is on an investment, then the higher the risk for that investment. In other words, the more risk you’re willing to take the greater the possible return on your investment. If you’re receiving a relatively high return for an investment that you consider to be low risk, or ‘safe’ then dig a bit deeper. The chances are that the low-risk investment has a lot more risks associated with the investment than you realise.

If you set an investment target (see Step 7) and know your investment timeframe, then you can work out the return that you need to reach your investment target. You will then be able to work out the level of risk you need to take to generate that return, and possibly adjust your investment target or timeframe if you’re not willing to take that much risk, or willing to take more risk.

Step 6: If necessary, appoint experts to help you

If you’re a beginner investor or you’re planning to invest in assets you don’t know much about, then appointing a qualified and independent financial adviser who knows more than you on the subject can be useful. If you’re planning your retirement, an adviser can be very helpful when navigating through the superannuation, retirement and Age Pension rules.

Financial advisers however are not tax experts. You’re likely to need to refer to an accountant at some stage to ensure that you understand the tax implications of any advice you receive, and the tax implications of any investment decision that you make.

Step 7: Create a plan – set an investment target

Accumulating real wealth can take some time, although you can help that process move much faster by creating a plan for the long term. A financial or investment plan involves setting clear goals, such as: investing for children’s education, or investing for early retirement or for a luxurious retirement, or investing to create financial freedom and leave your jobs, or investing to leave money to your grandchildren.

Whatever your financial goal may be, you need to have a fairly strong idea of how much money you need to achieve that goal. For example, if you’re planning to retire at the age of 45, or the age of 55, then you need to ensure that the money you accumulate will finance a retirement of 30 to 40 years.

Step 8: Decide whether to invest directly, or via managed funds, or a combination of both

The two main ways of investing are to invest directly in specific assets, for example, buy shares on the Australian Securities Exchange, or to invest indirectly, for example, purchase units in a managed fund or unit trust.

If you want to have total control over your investments, then investing directly is often the most popular approach. If you want to access investments that are not normally available to individual investors, such as office complexes or investments in emerging countries, then you may want to invest via managed funds.

Many investors use a combination of direct and indirect investing.

Step 9: Understand the 5 major asset classes

Generally speaking, you can invest in 5 main asset classes and all investments and investment products usually fall into one of the following asset classes:

  • Cash: includes high-interest bank accounts, cash management accounts and term deposits with terms of 6 months or less.
  • Fixed interest: historically involved bonds, which are effectively loans to a government, financial organisation or company. Also includes term deposits with terms of more than 6 months. More recently, fixed interest has included more complex and higher risk investments.
  • Australian shares: includes shares in Australian companies, but can also include any listed fund or product that invests in Australian shares.
  • International shares: includes shares in international companies, but can also include any listed fund or product that invests in shares in non-Australian companies.
  • Property: includes houses, apartments, offices, car parks, shops, shopping centres and even warehouses. You can invest in property directly, or invested via real estate investment trusts.

Some investment houses suggest that alternative assets, such as ‘private equity’ and ‘infrastructure’, are separate asset classes but they are really subsets of the above asset classes. For example private equity involves purchasing shares in companies not yet listed in public share exchanges.

Step 10: ‘Diversify’ is a common catchcry

The term ‘diversification’ means spreading your risk across a number of asset classes (asset allocation) and across a number of investments within an asset class (see Step 9 for an explanation of the major asset classes). The reason diversification is so important is that if one your investments is a dud, or one of the asset classes that you have invested in, is performing badly for a year or two, then your other investments should help maintain your overall investment return.

Although diversification can provide you with more stable returns, you’re less likely to generate spectacular returns from your investments. Note that diversification also means you’re less likely to suffer spectacular losses.

Step 11: Only invest in assets that you understand

Sounds basic doesn’t it? You’d be surprised by how many Australians lose their head when a sharemarket boom comes along, and invest in dodgy companies in a booming sector. Don’t invest in an asset or investment product where you don’t understand what the business is that you’re investing in, and you don’t understand how the managers of the business are going to generate profits, and in turn, dividends and capital gains for you.

Step 12: Understand the tax implications of any investment decision

Tax on its own should never determine an investment decision or strategy, but in Australia, tax touches everything. Before purchasing or selling any major investment, a quick chat with your accountant about the timing, or costs, of that transaction could potentially save you thousands of dollars in tax.

Step 13: Focus on real returns

The rate of inflation determines the purchasing power of your money. Inflation is the average rate of price increases and is measured by the Consumer Price Index (CPI). If you leave your money in a bank account that pays no interest, then a year later, the purchasing power of your money will be reduced by the rate of inflation.

When investing, at the very least, you want to earn returns that cover the inflation rate. If your investment return exceeds the inflation rate, then your investment has delivered a real return (that is, a positive return after taking into account inflation). If your investment return is lower than the inflation rate, then the real return is negative, even though the nominal return may be positive.

Step 14: Focus on real returns after fees and taxes

Investing costs money like nearly everything in life.  You need to take into account the costs of purchasing, holding and selling an investment when working out the investment return. Likewise, tax can affect your investments too and can take a chunk of your overall investment return.

Step 15: Keeping to the plan for the long-term

The major surprise for most budding investors is that you don’t have to be rich to become wealthy. The secret is to create a plan, set your investment target and keep your eye on the long term – and follow the remaining steps above.

It may take a few years to accumulate real wealth but for most Australians, having an investment portfolio working for them while they’re enjoying getting on with living life, is a compelling prospect.

Note: For many Australians, a superannuation account is also working for them while they’re getting on with life. For more information on superannuation, you can visit the free and independent consumer site,

This article first appeared on, a free information website for investors and beginner investors. This article is written by Trish Power, co-founder of consumer information website,, and co-author of You Don’t Have to be Rich to Become Wealthy (Wrightbooks), and author of Superannuation For Dummies (Wiley) and DIY Super For Dummies (Wiley).

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