This article has been written by an expert contributor, Kerry Craig, Global Market Strategist, J.P. Morgan Asset Management. Links in the article have been added by Equity Mates Media.
Why should I consider investing?
Learning to drive can be an exciting yet uncertain experience. It is often not a smooth one. Knowing when to brake, when to accelerate, keeping an eye on the speed, all the while watching for any risks on the periphery. Why take the risk at all, why not just walk? Life would be simpler, right? Most people who do want to learn to drive though generally all have the same goal – they can go further and get there faster.
Putting your money into a savings account is like walking. You’ll most likely get where you’re going to eventually but it will be slow, and there’s always the chance you’ll arrive late. Increasing wealth through purely cash savings has been extraordinary difficult for over a decade because the interest earned on cash has been virtually zero. This is starting to change, but the problem is that the real value of those savings, or their purchasing power, are being eroded by inflation. Exhibit 11 shows the cumulative return from holding cash when inflation is greater than the interest earned.
To reach your goals, whether it is saving for a house, a family, your education or your retirement – by investing rather than holding cash you are more likely to reach those financial objectives sooner.
When is the best time to start?
Money doesn’t grow on trees, but it can grow like one. The more time a tree is given to mature before being harvested, the larger it gets and the greater the rewards. While time is one of your greatest allies as an investor, the other is the compounding returns or the reinvestment of income.
Let’s assume that global equities rise by 5% a year annually2. A person that invests A$5,000 each year3 from the age of 25 will have approximately A$650,000 by the time they are 65. If that person started at the age of 35, they would have around half that amount by 65. If the person instead chooses to start saving at the age of 25 and hold cash, assuming a 1% return on cash4, that would result in a final portfolio size of A$250,000, which is around 40% of the final portfolio size if you chose to invest (Exhibit 2)5. Time is your “friend” but time and reinvesting together could be your “best friends/BFFs”.
Reinvesting the income earned from holding stocks and bonds could potentially boost the size of your savings and could have a significant impact on the growth of your assets.
It may feel like there is never a right time to start investing, but there isn’t a wrong time either. The key is to start on the investment journey and build a portfolio of diversified assets that will grow over time, based on your investment objectives and risk appetite. Every forest starts with one tree.
I know nothing about markets, how and where can I start investing?
You may not need to know how an engine works to drive a car, but it’s wise to get a license. Financial markets are complex and can be ‘noisy’ with the endless stream of commentary and business news channels.
Building up an understanding of the basic principles of investing and finding a source of information you trust (like Equity Mates get started investing podcast!) will help to make navigating the investment process much easier. Focus on steering your portfolio in the right direction and let the mechanic worry about keeping the engine running. One of the first principles of investing is diversification. As an investor you want to hold assets that do not all move in the same direction at the same time to balance out the risk.
A good starting point is to align your investment strategy to your end goal. This helps to ensure the appropriate level of risk for the time horizon and that you are on track to meet your investment objectives. The longer the time horizon the more risk you can take.
Key factors for consideration?
Those new to investing should focus on building a solid foundation for a portfolio and developing good investment habits, based on their investment objectives and risk appetite. This means having a long-term investment horizon, broad diversification with investments as well as a regular disciplined investment habit.
- Identify a starting value for your portfolio and consider an effective way to allocate it across different types of assets, for example equity and fixed income allocation across various parts of the world, based on your time horizon and end goal. Younger investors with longer investment time frames can potentially hold more growth assets like equites and be less concerned with the daily ups and downs in markets.
- Build your investment by establishing a healthy habit of regular contributions and consider reinvesting any income earned from your holdings back into your portfolio.
For more from the author, Kerry Craig, check out our episode with Kerry on the Equity Mates Investing Podcast on 21/07/22. Expert: Kerry Craig – J.P. Morgan Asset Management – State of global markets and what it means for investors
Part 2 of this series is available here: Investment questions for all stages of investing: Part 2 – ‘The Cautious Investor’
Part 3 of this series is available here: Investment questions for all stages of investing: Part 3 – ‘The Go-Getter’
Kerry is responsible for communicating the latest market and economic views from J.P. Morgan Asset Management’s Global Market Insights Strategy Team. With more than 10 years’ experience, Kerry provides valuable insights and perspectives on the economy and markets to investors. As a frequent commentator on Bloomberg, CNBC, the AFR and the wider financial press, Kerry is able to explain complex economic and market issues in a language that investors understand.
Sources:
1: Bloomberg L.P., Federal Reserve, U.S. Bureau of Labor Statistics, FactSet, JPMAM. Real returns calculated using U.S. Federal Funds median target rate minus CPI inflation. Policy rates for 2022 onwards are calculated using OIS forwards. CPI for 2022 onwards is U.S. 5Y inflation swap. Data reflects most recently available as of 11/04/22.
2: Based on J.P. Morgan Asset Management 2022 Long-Term Capital Market Assumptions.
3: Assuming no withdrawal during the period and the 5% rise is only on theoretical basis.
4: This information is provided for illustrative purposes only. Information shown is based upon market conditions at the time of the analysis and is subject to change. Not to be construed as investment recommendation
5: JPMAM. Values in AUD. For illustrative purposes only, assumes no withdrawal during the period, a 5% return on global equity and a 1% return on cash both on yearly basis in investors’ base currency with no indication and/or implication of actual return of investments. Actual investments may incur higher or lower growth rates and charges or even negative growth rates.