By Jarryd Thraves, Financial Advisor
Do you sometimes wonder what effect the latest billion dollar share market “correction”, property “boom” or “bust” is having on your investments? Understanding the differences between the various investment assets will help you enjoy peace of mind. A diversified portfolio can be a good way to manage investment risk.
Money in the bank, a term deposit or alike. Cash is, at face value, the safest, least volatile asset class. The return from cash is entirely in the form of income (interest), which means there is no capital growth. It also produces the lowest returns over the long term, and unless care is taken, the value of cash can be eroded by inflation.
- Fixed Interest
Next up the risk/return slope is fixed interest. This covers investments such as government and corporate bonds, bills and debentures. Once again, bonds mainly produce income, but because they can be bought and sold, their value can fluctuate due to changes demand and interest rates. The risk associated with a bond comes from the quality of the issuer of the bond. Australian government bonds are considered amongst the safest. At the other extreme, ‘junk’ bonds, issued by some companies who may be at risk of not being able to repay future debts, are higher risk.
Good old ‘bricks and mortar’ is often seen as a “safe bet” when in fact property is towards the higher end of the risk and return chart. For most, property requires borrowing which creates a cost associated with the investment and additional risk. Property is also less liquid, for example if you need some funds you can’t sell off a bedroom. The returns are largely influenced by the location chosen, quality of tenants, rent, and of course the cost of borrowing. Investors can choose from many different types of residential and commercial property, each with varying risk and return characteristics. It is important to remember that even though property is not revalued often, the market is cyclical and experiences upturns and downturns. Property can provide steady and reliable income, along with good prospects of capital growth when chosen well and can be a great asset within a portfolio.
Shares are considered high-risk investments, but they also offer higher returns to long-term investors. Comparing share investments over long periods of time often surprises people with the results. Many shares also provide income via dividends and can offer a level of diversification; it is for this very reason that the majority of superannuation investments include global and Australian shares. Similar to property, many Australian “blue chip” shares are often considered to be safe investments but any share carries a level of risk. As share prices are consistently revalued on markets this can cause anxiety for some investors. However, if you invest in the next Google or Apple, the capital growth can be spectacular!
- Alternative Assets
Some investments don’t fit neatly into the previous classifications so portfolio managers may place them into an ‘alternative’ asset class. This may include commodities such as gold, infrastructure investments, such as airports and toll roads and absolute returns funds, which rely on various trading strategies for their performance. All of these also have their own purpose and risks.
So how does all of this come together?
By altering the proportion of funds allocated to each asset class, portfolios can be constructed across the full spectrum of risk and return. If you’re considering investing make sure you understand:
- Your risk profile;
- The suitability of borrowing and impact on your risk profile;
- The purpose of your investment;
- Characteristics of your investment;
- How diversified your investments are;
- Up-front and ongoing costs associated with your investment;
- Tax implications of your investment and;
- The management of your investment.
If navigating investment options, structuring with tax in mind or any other area is of interest to you then feel free to contact us to discuss tailoring your own portfolio.
Jarryd Thraves is an authorised representative and credit representative of AMP Financial Planning. Blueprint Planning Pty Ltd (ABN78 097 264 554), trading as Blueprint Wealth, is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited, Australian Financial Services Licensee and Australian Credit Licensee 232 706.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
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