Planning and knowledge are key to successful investing and wealth creation. Making an investment can be a big decision and typically carries risk. The following potential investment opportunities and risk considerations will help you to start planning for your next successful investment.
Firstly, there are two golden rules of investing. Keep these in mind when you are thinking about asset classes and potential risks.
1. Diversification: the aim is to invest in different asset classes. This way, if one investment suffers losses, you will be protected and make it up with your other investments.
2. Time in the market: markets will always fluctuate but the longer you plan to stay invested, the less affected you are by short-term variation.
Risks and Risk Tolerance
Before you decide on the right investment for you, you should consider the risks of investing.
Investment risk is the chance that you will lose some or all of the money that you invest. All investments carry risks. The types of risks you face depend on your current circumstances. It is important to consider the following risks as this will help you choose the right investment for you:
- Interest Rate Risk: interest rate changes can affect your returns or cause you to lose money. This is a risk for fixed interest investments.
- Credit risk: a company (or government) you lend to will default on the debt and will not be able to make repayments.
- Market Risk: an investment drops in value due to changes in the economy or an event which affects one (or all) market sectors.
- Currency risk: international currency changes can impact investments and returns. This can be a key risk for international investments.
- Liquidity risk: Your investment cannot be sold when you want/need.
- Inflation risk: the value of your investment may not match the pace of inflation.
- Timing risk: the timing of your investment decisions may expose you to lower returns or loss of returns.
- Gearing risk: using borrowed money to invest can produce risks. Your investments may fall in value, but you will still have to pay the remaining loan plus interest on time.
As a general rule of thumb, the higher the expected return on investment, the higher the risks. Obviously, that means a lower expected return comes with lower risk.
Know your risk tolerance. This is your capability to cope with decreases in the value of your investment. Some factors that may influence your risk tolerance are age, financial goals, assets and health.
An idea that Coastal Advice Group CEO, Daniel Brown, uses to describe your risk tolerance is the “sleep factor” – knowing how much volatility you can handle. Ask yourself how you would feel if you went to sleep one day, woke up the next and found that your investment value had dropped 20%? If this causes you to stress, high risk investments are probably not for you.
What are your investment options?
There are numerous investment opportunities available for you depending on your current finances and your short- and long-term financial goals. Asset classes are the building blocks used to create a diverse investment portfolio. The following asset classes are options for you to invest into:
1. Cash: safest asset class with a high degree of capital security.
- Examples: bank/term deposits, savings accounts and cash management trusts.
- Suitable for: investors with short-term goals and a low tolerance to risk.
2. Fixed Income: a debt security by a bank, corporation or government that pays the investor an ongoing interest at a set rate.
- Examples: government bonds, corporate bonds and mortgages
- Suitable for: individuals with low-moderate risk tolerance, investors looking for stability.
3. Listed Property: listed investments in companies and listed property trusts which buy, sell, manage and/or develop a range of properties across different property sectors and locations around the world.
- Examples: direct investments in residential, industrial or commercial property.
- Suitable for: investors with long-term goals and moderate-high risk tolerance.
4. Australian Shares: represents part ownership of an Australian company. Shares are sold and bought on the stock exchange.
- Examples: Shares in companies listed on Australian Securities Exchange (ASX) e.g. BHP Billiton Limited and Caltex Australia Limited.
- Suitable for: investors with high risk tolerance and a long-term plan for investing.
5. Global Shares: same format as Australian shares with the benefit of investing in a broader range of regions, sectors and companies.
- Examples: Shares in companies listed on global stock exchanges e.g. Google and Microsoft.
- Suitable for: investors with high risk tolerance and a long-term investment plan.
6. Alternative Assets: behave differently to traditional assets.
- Examples: commodities, hedge funds, structured credit, unlisted property and private equity.
How can a Financial Adviser help you develop an Investment Strategy?
Financial advice can provide you with investment value by helping you:
- Set your financial goals
- Work out your risk tolerance
- Choose the right investments
- Make the most of your money
- Protect your assets
Based on our personalised financial advice, you can make the right investments to help you achieve your financial goals and build your future.
If you are looking to make your next investment, schedule a complimentary initial appointment with one of experienced Financial Advisers. We have offices located in The Junction (NFPG), Erina (CCFPG) and Sydney CBD (SWA).
DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group and Sydney Wealth Advisers are subsidiaries of Coastal Advice Group which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.