With so many emerging new technologies and hype around digital currency, it is hard not to get swept up in the latest and greatest trends. These investment trends are being made more readily accessible to us through the prevalence of social and mainstream media. However, it is important to remain disciplined to the investment fundamental which have been tried and tested and will help you to reach your financial goals and objectives over the long term.
The history of investment FOMO
FOMO or the ‘fear of missing out’ is not a new phenomenon and it is often a psychological driver in the consumer decision making process. A past example of this occurring was the dotcom boom which was a result of high levels of speculation around internet related companies as the use and adoption of the internet became increasingly prevalent.
Similar patterns are emerging amongst property, shares, and cryptocurrencies in particular. The housing market have increased by more than 55% in less than three years and jumped 33% in 2021 alone. Some buyers and investors are becoming more worried that if they do not take the opportunity to buy in now, they will lose their chances all together. However, before any financial decisions are made investors should be aware of the risks as well as the ongoing costs of owning a property. To read more about this, click here.
Crypto and digital currencies are becoming more popular but are also increasingly complex. This form of investment is not well understood are highly volatile. As all trades occur online through varying platforms and systems they are not backed by a centralised system. This means they are more vulnerable to error, hacking and scams. The market is also very risky due to its volatility and the sudden rise and fall of its value over short periods of time.
So, what are the facts?
There are some investment fundamentals that have been followed for decades and have truly stood the test of time for many investors. These principles can assist investors to ensure their strategy is appropriate for their personal circumstances and allows them to achieve their financial goals and objectives within their specified timeframe.
It is important to know what you’re invested in and therefore it may be a good idea to become familiar with the four main asset classes and their key differences. These include cash, fixed interest, property and shares. Cash includes any money held in bank accounts or other securities like term deposits.
Fixed interest refers mainly to government and corporate bonds which provide investors with regular interest payments and their growth or decline is contingent on interest rates. Shares, however, provide investors with a portion of equity in a particular company, are typically bought on a stock exchange and may provide income through dividends. Shares can be bought in both domestic and international companies. Investors can also invest directly in property through owning a home, investment property or commercial premises. These assets can increase in value overtime and if rented out can produce an income for investors.
The type and mix of asset classes is central to an investors returns as it determines the risk you will be exposed to as well as the suggested time you should hold a particular asset.
Growth vs Defensive Assets
Another key consideration to take into account is the difference between growth and defensive assets. Cash and fixed interest investments are considered defensive assets as investors continue to receive regular income irrespective of market down. They also experience smaller fluctuations in value compared to growth assets, but do not enjoy the same capital growth as a result.
Growth assets include shares, property and ETFs and other higher risk investments. These assets are more subject to market volatility as they are fully exposed to the economic and market movements, however they also offer investors greater gains and returns over the long term.
An unavoidable aspect of investing is risk. There are a few different kinds of risk associated with this investment but primarily refers to the ‘degree of uncertainty and/or potential financial loss inherent in a particular investment decision. Although this may sound unappealing to the risk averse, risk is measured in time and therefore the longer you are invested for greater ability you have to ride out market volatility and receive a positive return. Risk is inescapable even when investing in defensive assets as there is the risk of inflation, taxation or economic downturns in varying economies.
A way to help reduce the impact of risk on your portfolio is through diversification. This involves having your money invested in a mix of asset classes, across a range of sectors and industry both domestically and globally. This is what it means to not put all your eggs in one basket.
Another way to help you maximise your returns is through dollar-cost averaging. This strategy involves making regular investments over a set period of time whereby you are likely to purchase holdings at both high and low unit prices. This averages out over time and saves you from trying to always time the market when it is at its lowest, meaning you are invested over a longer period.
Another great benefit of investing is the advantage of compound interest which refers to ‘earning interest on your interest.’ This occurs when ‘interest gets added to the principal amount invested and the interest rate then applies to that total amount.’ This can make a significant difference in growing your portfolio over time and hence why it is important to remain invest for as long as possible.
If you would like assistance with your current investment strategy or would like to know more and take advantage of any of these investment fundamentals, please click the link to organise a 20-minute complimentary consultation with an EPG Wealth adviser.