Growing your wealth involves more than saving a part of your income. You need to invest your savings so that your money can generate more money. Knowing where and what assets to invest in requires a basic understanding of investment principles. We recommend you decide clear financial objectives before investing so that your portfolio is tailored to meet your needs.
What Is Investing?
While saving means to putting money aside, investing is about growing your wealth. This involves buying assets or investments that will generate income or capital growth (or both) over time. The value of your investments can change, but in the long term, investing should grow your wealth substantially.
To make wise investment decisions, you’ll need to understand the different types of investments and investment risk management.
Types of Investments
There are 4 main types of assets you can invest in. They include:
- Cash: money in bank accounts, term deposits and bank bills
- Fixed interest: longer term (greater than 12 months) term deposits, debentures, mortgages, government and corporate bonds
- Property: residential, commercial and industrial with direct investment or indirect (via trusts)
- Shares: Australian and International
Cash investments are the least volatile and you can access your money whenever you need it. The downside of cash is the low return compared to other forms of investments and no capital growth.
Fixed interest investments provide a consistent income stream. The return on investment is higher than that of cash.
Property and shares are growth investments. You invest in these assets to take advantage of the potential increase in future value, as well as income along the way. They are more volatile and carry more risk. The value can even fall below your purchase price in the short term. Over a longer time frame, these assets should yield far greater returns than that of cash or fixed interest investments. Aside from the potential for growth, property and shares can provide a regular income stream in the form of rental income or dividend.
Factors Affecting Your Asset Mix
An investment portfolio usually has a mix of the above assets. The proportion of each asset you hold in will depend on:
- Your financial goals
- The timeframe you have to invest
- How much money you have
- Your risk profile
Someone in their 20’s usually has a higher risk tolerance and will hold a substantial proportion of growth investments, (such as shares) compared to someone in their 60’s. A young investor has a longer time frame for their investments to grow and is less concerned with short term volatility.
Manage Risk with Diversification
All investments carry inherent risks. A sound investment portfolio takes your appetite for risk into account and has a diverse mix of both lower risk investments and higher growth investments.
Diversification spreads the risk and reduces the effect of market volatility. Investments that perform well can offset those that underperform yielding overall more consistent returns.
You can manage your risk more effectively through:
- Diversification between different asset classes, such as property and shares as well as cash and fixed interest
- Diversification within an asset class to ensure that you do not have overexposure to a single sector of the market, such as mining shares and bank shares
- Diversification over time. It involves making regular investments over a period of time so that you’re not putting all your money in at any one point. This method, also known as dollar cost averaging, smooths out price fluctuations as the cost averages out over time. It also removes the temptation to time or predict market trends.
Review Your Investments
Review your investment portfolio at least once a year. This gives you a chance to assess and rebalance your asset mix to reflect changes in your personal situation, take advantage of market opportunities, or reduce your risk exposure if necessary. Rebalancing a portfolio refers to making adjustments so that the percentage of your asset mix remains the same.
Below are 4 ways to rebalance your portfolio:
- Reinvest the dividends from the outperforming asset to one that is underperforming and may offer good buying value.
- Invest extra money into the asset that has fallen below its target value.
- Transfer money from the asset that has outperformed to one that has underperformed.
- Sell some investments to buy another that is below the target value.
Key Points on Investing
The 5 key points to take away from this article:
- Understand that all investments have inherent risks and some investments that offer higher returns are riskier than others.
- The performance of your investments will vary from year to year, so it important to take a long-term perspective.
- Don’t try to predict or time the market. There are many factors that influence market trends.
- Invest according to your risk profile. If you have a low risk tolerance, don’t hold a large portion of your money in volatile assets.
- Manage your risk through diversification; don’t put all your eggs in one basket.
Building an investment portfolio with the right mix of assets requires time and knowledge. Contact Moiler to discuss how you can grow your wealth to achieve your long term financial goals.
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Smart Ideas for Saving and Budgeting
This document has been prepared by Moiler Associates Pty Ltd, an Authorised Representative of Count Financial Limited ABN 19 001 974 625; AFSL 227232 (“Count”) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 and is for general information only. The presentation has been prepared without taking into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for your needs and consider talking to a Count Authorised Representative before making any investment decision. The relevant PDS should be considered before making a decision about any financial product. The information is provided as an information service only and does not constitute financial product advice and should not be relied upon as financial product advice. 9 July 2018.