The Basics of Investing

"we offer a wide range of investment solutions in order to meet our clients varying needs and objectives."

Choosing an investment strategy

Choosing appropriate investment strategies throughout your life can make a significant difference to the amount that you have in retirement. We believe that through education on the basics of investing you can gain the confidence and understanding required to help you take control of your financial future.

Asset classes

The basic building blocks of investment portfolios are the asset classes into which you invest. Each asset class has individual characteristics and carries a different level of risk and return to suit a range of investor types. Asset classes fall into two main groups income and growth.

ASSET CLASSES

INVESTMENT TIME FRAME

RISK

INCOME

 

 

Cash constitutes investments in short-term money markets and securities. Cash investments can be used as a diversifier or mixer to provide security to volatile or aggressive portfolios,and can also provide a shortterm investment solution.

Typical investment time frame of less than 12 months.

While cash is considered the ‘safest’ investment type, investors who invest their money predominantly in cash funds may run the risk over the long term of nominal returns after the deduction of fees and taxes and the impact of inflation.

Bonds (fixed interest securities) are investments in the form of agreements to repay fixed amounts of money at predetermined dates in the future. Bonds are generally used by governments, banks and corporations. Members can invest in Australian and international bonds–remembering that fluctuating exchange rates need to be factored into international bond investments.

Bonds typically provide investors with moderate investment returns over the longer term and provide a low-to-medium level of risk for investors.

Bonds may be suited to investors seeking conservative investments over the longer term.

GROWTH

 

 

Property includes a number of different types of properties, such as residential, commercial, office, industrial, hotel and retail.

There is a medium-to-high level of risk in a property investment and a medium-to-high level of return. Returns on property can include both capital growth (increase in the value of the investments) and income (rents paid by tenants or distributions paid by the investments).

Property investments are suitable for long-term investors and can provide a higher level of growth without the level of volatility that occurs with share investments.

Shares (Australian and international) represent units of ownership in a company. Australian shares represent only two per cent of the world’s stock markets. However, investing in Australian shares can provide investors with potential tax advantages known as dividend imputation credits. Investors need to factor in fluctuating exchange rates to international share investments.

Shares are considered riskier than all other asset classes. Although they tend to provide higher investment returns over the long term, they do experience short-term volatility based on the fluctuations of the stock market and the underlying company’s performance.

Shares are most suitable for long-term investments. Investors need to be prepared to experience moderate-to-extreme highs and lows in order to gain greater investment returns.

Diversification

In simple terms, diversification means ‘don’t put all of your eggs in one basket’. It means spreading your investments across different asset classes to balance your returns; if one asset class is performing poorly, another investment may be achieving better returns.

The three main ways of diversifying are:

  • Across different asset classes – this means investing in more than one main asset class;
  • Within different asset classes – this means investing in a number of assets over a range of sectors in an asset class, such as resource or industrial shares and listed or unlisted property trusts; and
  • Across different styles of investment management – this means choosing a mix of fund managers who have different investment styles. This will reduce your exposure to one style of management or one type of investment. Individual investment managers have different strengths and weaknesses and perform better in different market conditions.

Risk & return

What is risk?

Risk can take on many forms for investors. For example, there may be the risk that your investments will decrease in value, your capital will not grow at a greater rate of return than inflation or you will not reach your financial goals. Additionally, you may have to consider stock market risk, currency risk, interest rate risk, fund risk, company risk, etc.

The relationship between risk & return

There is a direct link between risk and return. Simply put, investors must be prepared to accept additional risk to achieve higher returns. Shares and property may offer higher returns than other asset classes in the long term, but they will also provide the highest level of performance volatility

Generally, the higher the risk borne by the investor, the greater the potential for short-term capital value fluctuations.

The following diagram illustrates the relationship between risk and return.

How investment time frames influence your risk profile

When determining the level of risk that you are prepared to accept, it is important to factor in your investment time frame, i.e. how long you are planning to invest. Selecting investments that best match your goals and time frame is another way to manage investment risk.

Some investors with short investment time frames are concerned about protecting their capital and have very different needs to investors who want their investments to increase significantly over a long period of time. Some investment options may not be readily converted to cash within a 30-day time frame (illiquid investments). This may restrict your ability to switch these investments when you wish to and this needs to be taken into consideration when you initially invest in these illiquid assets.