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A smart investor doesn't rely on good luck. Instead, they take the time to consider their investment goals. Then they develop a plan and choose investments that align with their needs and objectives.

Here are our tips to put you on the path to investing smarter.

Work out your needs and objectives

If you're planning to invest, there are a few steps to take before you jump in. Preparation is the key to success.

Are you ready to invest? 

Make sure you're ready to invest by checking you have:

Develop a plan

If you have a financial goal in mind, it will be easier to develop an appropriate investment plan. Think about what you want and why, and set a timeframe to achieve each goal. Then you can measure all investments against your plan.

See develop an investing plan to find out how to create a realistic plan that meets your needs.

Video: How to invest smarter

Video about how to invest smarter with Nicole Pedersen-McKinnon.

Nicole Pedersen-McKinnon talks about how to know when you are ready to invest, developing an investment plan, and knowing what to invest in.

Transcript: How to invest smarter

Understand risk and return

While your investment goals are very important, you should also consider your appetite for risk when you're shaping an investment plan. In a 2014 study by ASIC on financial behaviours, 28% of people said they had heard of the risk/return trade-off but didn't really understand it.

Test your knowledge of risk and return, diversification and investment products by taking our investing challenge.

Investing challenge

Successful investors understand the types of risks that can affect their investments and what they need to look out for. Find out more about risk and return and goals and risk tolerance.

Diversification

A good way of managing risk is to spread your money between different asset classes such as cash, fixed interest, property and shares. This is known as diversification.

Diversification will leave you less exposed to a single economic event, so if one business or sector you've invested in fails or does badly, you won't lose all your money. For more information, see diversification.

Borrowing to invest

If you are borrowing money to invest then you are taking even more risk if your investments fail. Find out more about borrowing to invest and negative and positive gearing.

Judging expected returns

To help you work out whether the returns offered by the investment opportunity are reasonable, look at the expected returns for other similar products. If the returns seem very high in comparison, be very wary. And be aware that some investments that appear to offer relatively modest returns can also be extremely risky.

Our section on complex investments explains how specific investments work.

Get to know the investment before you invest

Smart tip

Be wary of get rich quick schemes. Avoid investment disasters by scanning our investment warnings and our companies you should not deal with list.

Before you jump into any investment, carefully assess its suitability.

Read the product disclosure statement (PDS) for each investment product and make sure you understand the product's key features, fees, commissions, benefits and risks. Ask the product provider or a financial adviser if you need further clarification.

Here are some other things to consider before you hand over your money.

Protecting your capital

How would you feel if you lost some or all of the money you invested? Would you be able to recover or would you be in deep trouble?

If protecting your capital is important, then you need to find out where you stand if something goes wrong with the investment. Words like 'safe' and 'guaranteed' mean nothing if the investment fails, and the fine print says you'll be the last on the list of creditors.

Accessing your money

Check to see if there will be heavy fees or penalties to get your money back before the end of the investment period.

If flexibility is important, think about investing in other financial products that allow you to access your money when you need it.

Know what your money is being used for

If you know what your money will be used for, you will be better placed to decide how risky the investment is and whether you're comfortable putting your money into it.

If you're investing in a company, find out what the company does, how long they've been in business, and how successful they've been with similar projects in the past. See prospectuses for more information about assessing an investment.

Consider the tax implications

An investment is 'tax-effective' if you end up paying less tax than you would have paid on another investment with the same return and risk.

While lower tax can help your savings grow faster, you should never base an investment decision on tax benefits alone. See make tax work for you for more information.

Monitor the investment

Even with careful planning, you can still get caught out, for example, economic conditions can change and company profits can vary from year to year, so it's important to keep track of your investments.

Look out for warning signs

There's no fool-proof method of spotting losses in advance. However, sometimes there are warning signs that an investment is going south. See keep track of your investments to find out the warning signs.

Don't panic

Market and economic conditions can change rapidly - but a panicked reaction can often make things worse. Some investors try to time the market and fail. If your strategy is sound, and the investment is long-term, stay with it.

Avoid scams

Investment scams are often so professional, slick and believable that it's hard to tell them apart from genuine investment opportunities. See our tips for how to spot investment scams.

Smart investors don't rush; they prepare, plan and then monitor their investments. Make sure you're clear about why you're investing and only invest in products you understand.


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Last updated: 13 Oct 2016