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Nobody has a crystal ball to look into the future, but it’s important to have a general understanding of how investing works so you can build your assets for financial security. And it doesn’t hurt to know your options and be aware of potential associated risks and returns.
You may have heard the term “risk” mentioned when it comes to investing, but what exactly is risk? Matt Morrison, CFP® from The Practice in Parkview, Melbourne, says risk can be anything from short term fluctuations in returns on your investment, right through to a permanent loss of capital. A more extended definition of risk may be the possibility that an investment will not achieve the expected return over the investment time frame.
“The golden rule is: the higher the potential return, the higher the likely risk,” says Morrison.
Allocation of your money across various asset classes allows for diversification. Morrison says this remains a crucial element in protecting against downside risk in the short term, while providing more consistent returns over the longer term.
“Typically, the various asset classes perform differently at different times. Allocating to solely one asset class can be a high risk strategy,” he says.
Four main asset classes
The main areas you can invest in are:
Cash can mean money in the bank, savings, transaction accounts and term deposits. Cash is the most secure of the four main asset classes, but provides the lowest return.
Fixed Income is a general term for government and corporate bonds. Typically bond investments are less volatile than property and shares and give a lower return.
Property investing can be residential, commercial or industrial. You can buy property yourself, or use a property managed fund which will invest on your behalf.
With residential property, typically capital growth over time is higher than the income earned. Commercial property is often the opposite, with the comparatively stronger commercial property rental returns exceeding capital growth over time.
Share investing can either be via direct shares or a managed fund consisting of Australian shares, US shares, or international shares.
With share investing you are able to own a small piece of a large company and share in the future growth of the company and profit along the way.
One of the main pieces of advice a financial adviser will give you is to recommend a diversified portfolio in various asset classes. When constructing your portfolio, your financial adviser should take into consideration of which stage in your life cycle you are in and your risk tolerance. This will determine how much growth assets to defensive assets your portfolio should have.
This article contains general financial advice only. It is provided by an Australian Financial Services licensee (AFS licensee) or the employee or authorised representative of an AFS licensee as identified in the article.
General financial advice does not take into account your objectives, financial situation or needs, and you should consider seeking professional financial advice before acting on the general advice provided.
Matt Morrison is a CERTIFIED FINANCIAL PLANNER® professional. He is director, wealth advisory at The Practice in Melbourne. AFSL 315598
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