Investing comes in many shapes and sizes and this can be daunting when you are trying to decide what you should invest in. Ultimately what you invest in should be based around your goals and how much risk you are willing to take. Understanding broadly how different types of assets work enables you to match your investments to your
circumstances.
Investments are categorised as growth investments or defensive investments. Growth investments, as the name suggests, have the potential to increase in value over time and produce higher returns. They are also assets that can fluctuate in value (due to economic factors, supply and demand etc) so are suitable as longer term investments when you have the ability to ride out the markets ups and downs.
On the other hand, defensive assets tend to generate a steady income and have little or no change in capital value. The trade off for the reduced risk is a lower expected return overall and these assets are best used where certainty is more important than maximising return. For example when retired and living off your savings it is important to know that you have a steady income and limited risk of losing the money you have accumulated
over a long period of time.
When investing you can create a mix of different assets that fit with your personal circumstances and risk tolerance.
Shares
Shares in a business means that you own a part of the business and entitle you to a share in the return of that business. Returns from a business investment can come in two forms, a dividend which is the payment of a portion of the business’s profits and capital gains which is an overall increase in the value of business.
The value of shares are volatile and can fall below the price you paid for them. As such, shares or equities and they are sometimes referred to are considered one of the riskier asset classes though historically they have delivered higher returns.
Due to the price volatility and risk, shares are usually more suited to longer term investors who are comfortable with withstanding market ups and downs
Property
Purchasing property can also generate two types of return. The property can be rented out to derive income and also the value of the property could increase and result in a capital gain.
The return on a property will ultimately be determined by supply and demand. Things such as location, condition and features of the property are important, but equally broader factors such as population growth, level of new building activity (impacting supply) and general economic conditions.
Whilst historically property prices have increase over time (hence they are a growth asset), like shares property prices can fluctuate and it carries the risk of loss. Also the cost of buying and selling property are high which all contributes to property also being suitable as a long term investment.
Property can be purchased directly (for example buying a house or apartment) or indirectly through a property fund, which like shares provides partial ownership of property.
Cash
Cash investments include depositing money with a bank, either in something like an online savings account or a term deposit that pays interest. The interest rate offered will be set by the bank which will base this off what they could lend money out for/ alternative use of the money. Interest rates will be advertised by the bank and therefore the return on investment is fairly transparent. Cash does not offer capital growth, but it delivers regular income and is low risk.
With a bit of research, it is easy to compare the rates offered by the various banks to see what a competitive return is. You just need to ensure that you’re are comparing like with like. For example the rate on a one year term deposit is should not be compared with the rate of a one month term deposit. Interest is a receipt of income
Fixed interest
Fixed interest investments include things like bonds which are essentially when governments or companies borrow money from investors and pay them interest in return. The rate of interest offered will depend on the perceived riskiness of the borrow with government bonds offering lower rates than companies (as the Australian Government is seen as unlikely to default on its bonds).
In addition to the rate of interest, bonds will also have a fixed term which can be as short as 90 days or up to 10 years. The amount borrowed, rate of interest and term of the bond is fixed however bonds can be sold and so bond prices do fluctuate and there is a risk of a capital loss if they are not held to maturity of the term.
Bonds are considered a defensive asset, as they generally offer lower potential returns
and lower levels of risk than shares or property.
What are Shares?
Shares in a business means that you own a part of the business and entitle you to a share in the return of that business. Returns from a business investment can come in two forms, a dividend which is the payment of a portion of the business’s profits and capital gains which is an overall increase in the value of business.
The value of shares are volatile and can fall below the price you paid for them. As such, shares or equities and they are sometimes referred to are considered one of the riskier asset classes though historically they have delivered higher returns.
Due to the price volatility and risk, shares are usually more suited to longer term investors who are comfortable with withstanding market ups and downs.
What is Property ?
Purchasing property can also generate two types of return. The property can be rented out to derive income and also the value of the property could increase and result in a capital gain.
The return on a property will ultimately be determined by supply and demand. Things such as location, condition and features of the property are important, but equally broader factors such as population growth, level of new building activity (impacting supply) and general economic conditions.
Whilst historically property prices have increase over time (hence they are a growth asset), like shares property prices can fluctuate and it carries the risk of loss. Also the cost of buying and selling property are high which all contributes to property also being suitable as a long term investment.
Property can be purchased directly (for example buying a house or apartment) or indirectly through a property fund, which like shares provides partial ownership of property.
What is Cash ?
Cash investments include depositing money with a bank, either in something like an online savings account or a term deposit that pays interest. The interest rate offered will be set by the bank which will base this off what they could lend money out for/ alternative use of the money. Interest rates will be advertised by the bank and therefore the return on investment is fairly transparent. Cash does not offer capital growth, but it delivers regular income and is low risk.
With a bit of research, it is easy to compare the rates offered by the various banks to see what a competitive return is. You just need to ensure that you’re are comparing like with like. For example the rate on a one year term deposit is should not be compared with the rate of a one month term deposit. Interest is a receipt of income