Over the last year investors have experienced losses to their wealth, the likes of which have not been seen since the Great Depression. This has caused some potential investors to question if they should get into the market. The two most important aspects of investing are having a long-term plan and understanding your level of risk tolerance.

Investor Psychology

Investor psychology is a hugely powerful force and, unfortunately, tends to harm investors over time. The tendency is for most investors to buy stocks after markets have risen, when the economy is doing well and public sentiment is positive. When financial and corporate news is generally bad, investors sell their stocks at distressed prices. These actions are the prime reason why the average investor receives less than the average return of the markets.

Prepare Yourself to Invest

The first step in investing is to prepare yourself. This means pay off your credit cards first, create a financial goal for yourself and then create a budget that sets aside an amount to invest every month. For example, if at age 25 you begin saving only $100 every month for 10 years at an 8 percent return and then let that sum remain invested until you are aged 65, you would end up with $201,399. Consistent saving is the key.

What about the ups and downs in the market?

The ability to predict when markets will peak and when they have bottomed is a skill that every investor would love to claim, but obviously no one is able to do it. Over the long term, the best way to enhance your wealth is to set up a plan that invests your assets in a well diversified manner and then stick to it through the ups and downs. It is important to review your plan on a regular basis to ensure that it continues to make sense as you age and your life circumstances change.

How do I pick what to invest in?

The ideal portfolio is asymmetrical — one that participates in the upside when markets are rising and minimises the downside when markets are falling. Last year was an extreme case where diversification worked less well than usual. However, diversification has been the one 'free lunch' available to investors and will continue to benefit everyone. We believe at AFL Investments that investing beyond the traditional equity and bond split, as well as dividing your portfolio into additional asset classes, as the large institutional investors tend to do, will give you better chance at those asymmetrical returns.

Risk Levels

It is critical that you assess how much risk you are comfortable with, and then set up a long term plan to invest on that basis. Simply put, if you can't sleep at night based on value swings in your portfolio then you've taken on too much risk.

Working with a Professional

Once you've created a plan and decided how much risk you're comfortable with, then consult a professional advisor to set up a portfolio that will meet your long term goals. It is possible to create your own portfolio, but it is a lot of work and requires constant market monitoring. Just like purchasing any other valuable acquisition, you want a professional to consult and advise you. Use care in choosing your financial advisor: understand their philosophy, their fee structure, the transparency of their reporting and the expected service levels.