Investors have almost options available to invest their funds.
Before we get to these, there are a few important concepts for investors to understand.
First and foremost is the importance of understanding the minimum time frame that these funds will be invested. Someone who is wanting to spend their funds within the next 12 months cannot afford a market downturn and so must invest at the low-risk end of the investment spectrum. As the time frame extends so does the level of risk that can be considered for the portfolio.
What is risk?
From an investment perspective, risk is defined as the chance that the actual return of an investment differs from the expected return.
For example, a term deposit can be considered low risk as there is a low chance that the interest that the investor receives will be different from the interest rate quoted by the bank.
For investments in a company (e.g. a share) these are considered high risk for 2 reasons:
The expected return is not a known quantity and needs to be estimated by the investor, and
The share price of a company can vary considerably in the short-term.
It is important to understand that risk is not a bad thing. Whilst a high-risk investment has the chance of achieving a lower return than expected, it also has the chance of achieving a greater than expected return.
Risk is a crucial part of any investment portfolio but the investor must be aware of the risks they take and have strategies in place to deal with these risks.
Tolerance to risk
The second most important aspect that investor must consider when deciding on the composition of their investment portfolio is their tolerance to risk. Even if an investor has a truly long-term investment time frame and could take a high level of risk, if this keeps them awake at night then they have taken too much risk.
What can you invest into?
Broadly, any asset that an investor purchases can be categorised into one or more of these asset classes:
Furthermore, they can purchase these investments directly (e.g. Buy a share on a stock exchange or a property in their name) or via some form of pooled investment (e.g. Managed fund).
Pooled investments can generally be classified in two ways:
Passive or Active
Listed or Unlisted
Passive investments track some form of investment market, such as a country's share market. These are generally low-cost investments due to lower levels of human intervention.
Active investments involve a team of people making decisions about which companies they feel are the best to invest into, and those that should be avoided. The costs of these type of investments is generally higher due to more people involved in the decision-making process.
Listed investments are available to purchase on some form of exchange (e.g. A stock exchange) whereas unlisted investments are generally accessed via an investment platform (or wrap account).
There are advantages and drawbacks of each type of pooled investment and it is important for the investor to determine what they are trying to achieve first and then seek appropriate investments, which may involve one or more of the various types of pooled investments.
Common examples of each investment type:
How we help
Whilst most investors are trying to achieve a great return on their funds, not all investors are aiming for the same target. We do not want to make any assumptions prior to helping our clients invest so we dig deeper to uncover if there are any specific goals that they are trying to achieve with their funds.
Once the goals are known, we will:
Ensure we are both aware of the minimum investment time frame of the funds to be invested, and
Assess their tolerance to risk.
By determining these, it should prevent a sell-down when the investments have fallen in value. Next, we design a plan that includes strategies to deal with the worst-case scenario when (not if) the investment markets fall.
Lastly, we construct a portfolio of investments to target the goals of our client, considering all the available options:
Asset classes – cash, bond, shares, property
Direct ownership or via a pooled investment
Passive or active investments
Listed or unlisted investments
Please get in touch with us if you would like to sit down with us to discuss this in more depth.
This guide contains general information about the benefits and risks associated with investing. It is for general information purposes only. It is not intended to be, nor should it be read as specific personal investment or risk advice. This guide provides an overview only and should not be used the sole resource to design an investment portfolio.
Some of these ideas may not suit your own circumstances. Before acting on any of the information contained in this guide you should obtain personal advice from a specialist investment professional and seek specialised taxation advice. Both can provide you with appropriate advice tailored to your specific investment needs, objectives and financial situation.
Rowe Partners Wealth Advisors Pty Ltd T/A Rowe Partners Financial Planning ABN 80 624 169 115 Rowe Partners Financial Planning is a Corporate Authorised Representative (1262602) of GPS Wealth Ltd AFSL 254544 | Australian Credit Licence 254544 | ABN 1700 5482 726