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Starting your investment journey can be both exciting and overwhelming. To help you navigate the investing world, Funding has created a Learning Centre—a valuable resource filled with content related to property financing and investing. Here are three essential phrases to kickstart your journey:
Diversification is a risk management strategy that spreads your investments across different assets, sectors, or geographic regions. The aim is to minimise the impact of any one investment’s poor performance on your portfolio.
Diversifying your investments reduces the risk of losing all your capital if one asset or sector underperforms. Diversification can also help stabilise your portfolio’s volatility and provide more consistent returns.
Example: Instead of putting all your money into one company’s stock, consider investing in various stocks, bonds, real estate, and international assets—which can help balance the risk, so if one investment doesn’t do well, others may perform better and make up for the losses.
Compound interest is reinvesting your interest on an investment, earning additional interest over time. You earn interest not only on your initial principal but also on the accumulated interest from previous periods.
Understanding compound interest is crucial because it emphasises starting your investments early. The longer your money remains invested, the more it can grow due to the compounding effect, which can significantly enhance your wealth over time.
Example: If you invest $1,000 at an annual interest rate of 5%, you will have $1,050 after one year. In the second year, you will earn interest on $1,050, not just the initial $1,000, leading to $1,102.50 by the end of the second year. Over many years, this compounding effect can lead to substantial growth.
Risk tolerance refers to the variability in investment returns you are willing to handle. It demonstrates your capacity and willingness to endure market fluctuations and potential losses in pursuit of higher returns.
Understanding your risk tolerance is essential in selecting investments that align with your comfort level and financial objectives. It ensures you can adhere to your investment strategy during market downturns without making impulsive decisions that could jeopardise your long-term goals.
If you have a high risk tolerance, you may be comfortable investing in volatile assets such as stocks or cryptocurrencies, which offer higher potential returns but carry significant losses. On the other hand, if you have a low risk tolerance, you may prefer more stable investments like bonds or savings accounts, which provide lower returns and risk.
As you start your investment journey, it’s helpful to understand phrases like diversification, compound interest, and risk tolerance. Diversification helps manage risk, compound interest maximises growth, and understanding your risk tolerance ensures that your investment strategy aligns with your financial goals and comfort level.
By familiarising yourself with these concepts, you’ll be better equipped to make informed decisions and build a successful investment portfolio.
For more detailed information on investing basics, visit our Learning Centre or the Australian Securities and Investments Commission’s MoneySmart website, which offers a wealth of resources and guidance for new investors.
DISCLAIMER: The information provided on this page is for general informational and educational purposes only and is never intended as financial advice. While we strive to ensure that the content is accurate and up-to-date, it may not reflect the most current legal or financial developments. Always consult with a qualified financial advisor or professional before making any financial decisions. Use the information at your own risk.
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