The Motley Fool

How to start investing in 2020

Starting your investment journey is an exciting time. If you’ve decided 2020 will be the year you start your investment portfolio, congratulations! There is no better time to get started than right now. Here we run through how to start investing in 2020.

1. Start with your goals

The first step on your investment journey should be to figure out your goals. What are you investing for? It could be to build your net worth, create a second income stream, save for retirement, or a number of other things. Your goals, time horizon, and risk tolerance will influence your investment choices.

Those with a longer time horizon may be able to take on riskier investments as they have a longer period to make up for any losses. People with shorter time horizons may choose more conservative investments in order to avoid risking capital. It is generally recommended that those investing in ASX shares have a time horizon of at least 5-7 years. This allows investors to ride out fluctuations in the market.

2. Know your risk profile

Understand how you tolerate the risks associated with investing. With any sharemarket investment, there is a chance of losing capital if share prices decline. There is also a chance of making a capital gain where prices increase. Some people will be comfortable taking on more risk if they believe the potential return is worth it. Others will prefer a more conservative investment strategy utilising lower risk investments, such as bonds.

Your risk profile will vary over your lifetime – when you are in the accumulation phase of life you can afford to take greater risks. As you near retirement you will likely reduce your allocation to risky assets as the consequences of a capital loss become more serious.

3. Think about your asset allocation

Figure out how you want to allocate your investment portfolio across different asset classes. This will depend on your timeframe, risk profile, and investment goals. Those looking to grow their net worth with a long time horizon will likely devote a greater proportion of funds to investments such as growth shares. People with shorter time horizons or for whom capital preservation is important will allocate a higher proportion of funds to lower risk assets. Like your risk profile, your asset allocation should shift over time as your goals change and you move through different phases of life.

4. Open a share trading account

Start looking into share trading accounts in the market. From CommSec to Macquarie, to nab trade, there are a wealth of options available. Think about what you want from your share trading account – if trading on the go is important to you might want an easy-to-use app. If keeping up to date is key, look at the notification services offered by different brokerages. Think about how often you plan on trading and look at the fees each brokerage charges for trades. If you’re trading frequently fees can add up and eat into your investment returns.

5. Do your research

Start educating yourself about your investment options. Learn about the ASX and the securities that are traded on it. Look into ETFs that may be of interest to you. Begin to map out how you will allocate your funds not just between asset classes, but between individual holdings. Take note of ASX shares that are of interest and start investigating the companies they represent.

If you are looking to create a second income, you will likely consider ASX dividend shares such as National Australia Bank Limited (ASX: NAB), BHP Group Ltd (ASX: BHP), or AGL Energy Limited (ASX: AGL). If you are less concerned about dividends and instead are seeking to build wealth over the long term, growth shares such as Afterpay Ltd (ASX: APT), Xero Limited (ASX: XRO), and Livetiles Lt (ASX: LVT) could be of interest.

6. Don’t forget to diversify

Diversification is an important step in managing the risk of your portfolio. In a nutshell, diversification means not putting all your eggs in one basket. This means you should spread your investments across a range of asset classes and individual investments within asset classes. The exact proportions will depend on your investment goals, timeframe, and risk tolerance.

Many investors choose to use ETFs as a quick and easy method of portfolio diversification. ETFs such as the Betashares Australia 200 ETF (ASX: A200) or the iShares Core S&P/ASX 200 (ASX: IOZ) give exposure to the S&P/ASX 200 index in a single trade. Other ETFs can provide exposure to overseas sharemarkets – the Vanguard US Total Market Shares Index ETF (ASX: VTS) provides exposure to US-listed companies while the iShares Europe ETF (ASX: IEU) provides exposure to many of Europe’s largest listed companies.

7. Keep watch

Once you’ve made an investment, keep an eye on it. This doesn’t mean obsessively checking the price. What it means is developing an awareness of events which could affect the value of your investment. If you’ve invested in ASX shares you will want to stay on top of how the underlying companies are performing. Keep abreast of trends affecting industries you are invested in and think ahead as new trends emerge.

Monitor the market for new investment opportunities that meet your investment criteria. You can do this using notification services offered by your brokerage, the financial news media, online investment services, or a combination of methods. Think about how any new investments you might add to your portfolio contribute to your overall investment goals.

8. Remember the value of time

Your most valuable asset for generating investment returns is time. Time allows small companies to grow larger, allows your returns to compound, and allows you to learn and grow as an investor. The value of time cannot be underestimated.

Time is particularly important when it comes to compounding returns on investment. When investments such as shares pay a return in the form of dividends and these returns are reinvested, investors begin to earn returns on returns. These are compounding returns and over time can add up significantly. For example, if you invest $10,000 today and earn a 9% return compounding annually, in 30 years you will have $132,667. Without compounding you would only have $37,000.

Foolish takeaway

By first investing your time and effort you can start investing in a way that works for your goals and preferences. Follow these 8 simple steps to start investing in 2020 and keep reading for three great dividend shares.

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Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of National Australia Bank Limited and Xero. The Motley Fool Australia has recommended LIVETILES FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.