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This week’s advisor is Matthew Fenning, from AdviseWise. Here’s what he said in response to Sarah’s question:

A fantastic first question from any future investor looking to take the plunge into personal finance.

The best place to start is with the why – what are your goals, or what are you looking to achieve from your investments?

If you don’t have a goal yet, it is important to stop and develop one that you want to achieve from investing – goals will provide direction, motivation, and purpose, and as a result will help you become a disciplined investor.

Let's say your goal is to build a $100k portfolio over the next decade – what might that look like?

Well, if you were to invest $500 per month every month, assuming that on average over a 10-year period, your return was 10% per annum, your investment would have compounded to around $100,000 over that time.

Sounds great right?

So, what are some proven ways to allocate your investments to get there?

Starting with a “core” investment or investments that are well diversified will set you on a path to achieving your long-term goal.

An example would be starting with a global index-based equity ETF (exchange traded funds) and an Australian index-based equity ETF. Starting here you can accumulate investments indirectly in a broad-based portfolio but manage trading and investment costs by having a single holding in the overarching ETFs.

Nobel Prize laureate, economist Harry Markowitz is reported to have said “diversification is the only free lunch in investing”?

Why is that?

Practically speaking, diversification helps us select investments that maximise returns within an acceptable level of risk, in other words, why take more risk than you need to in order to get the same result.

What does diversification look like?

In equity markets this can mean spreading out investments across many different differentiating factors for example industries, countries, company size, geographical location to minimise your exposure to shocks in the market and consistently perform over the long term.

There are very few stock pickers who consistently outperform the market in the long term, and they do it all day every day, and by concentrating their investment in a smaller number of stocks, their returns may well be higher, but they carry with that a much higher risk on the downside as well.

With the explosion of ETF’s and micro investing funds this has also never been more achievable enabling you to invest that money no matter how large or small the amount.

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