Whether you are saving to buy a house, want to build a robust long term investment portfolio or you want to start saving for your child's education, investment is about making wise choices and only taking risk when reward is likely to follow. We utilise tried and tested techniques to build your wealth and keep you on track towards your goals.
We have a strong belief in long term investing for long term wealth. Each person has different needs and time frames for what they want to achieve so what works for your mate at the pub might not be right for you. Taxation can be a big part of investing as any gains you might make are often taxable. Combined with other costs, this can quickly offset the reason you got into investing in the first place.
Risk versus return
Often referred to as “volatility” the simple act of investing in higher risk options can mean that the value of your asset can change more rapidly and extremely – it can go up or it can go down more rapidly in value. The tendency is that investment values increase over time so a higher risk would lead to a greater return on average. However, this is where diversification (not having all your eggs in one basket) is key.
Below we have outlined the key types of investment options starting at low risk and ending in high risk.
Cash savings does not refer to putting your money under the mattress. Instead this type of investment refers to keeping your “cash’ in a savings account. This investment option helps to protect against inflation and also makes it easier to make transactions when you need to. Additionally, if you have a mortgage, cash savings can often be held in a “offset” account which can reduce the interest you pay on your home loan.
Fixed term deposits are the most common type of fixed interest. You agree to lock away your money for a determined period of time and the bank pays you interest in return. Bonds work in a similar fashion but instead of putting money in account you are buying a small interest in a government or a corporation. These often pay higher interest than fixed term deposits but are more volatile and have greater penalties for early access.
Property can be anything from owning a parcel of land without any buildings on it, to owning a small part of a toll road in North America. Australians have always invested in bricks and mortar as a secure form of investment that pays an ongoing rental income, and although the property market has its ups and down and tenants may come and go, this has proven itself as a good road to building long term wealth. For many it provides both rental income and as the property increases in value, provides growth of equity often in tax a effective manner.
Another part of the property investment sector is made up of listed property trusts. These are often large investments like shopping center office towers or infrastructure assets that produce an income and raise capital through investors, usually superannuation or managed funds.
Buying shares in a company is essentially owning a small part of that company and sharing in its profits and growth through dividends (a small payment made once or twice a year to each shareholder) or the price of the share increasing. Shares are traded on an exchange and are worth whatever the “market” values them at. Fundamentally this is made up by the value of a company such as their assets and cash flow but is often made up by what investors predict this might be in the future. This phenomenon became abundantly clear in the “dot com” boom of 2005 when companies with no income or tangible assets were showing huge growth based purely on investor speculation.
Once again, the risk/return trade-off plays a big part in selecting the shares that are right for you. In a very simple view, a company that is larger will tend to be less volatile than a company that is small in terms of market capitalization. The top 20 index is a good example of “large cap” companies that have a very strong presence on the Australian market. They often pay dividends each year which have a portion of tax paid on them already. Next in line is “mid cap”, these are established companies that often do not produce dividends but have higher potential for gain as they grow in size. Last but not least we have small caps and speculative stocks, these very rarely produce dividends and can change wildly from one day to the next which is why they are often referred to as “penny dreadfuls”.
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