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Investment strategies really do come in all shapes and sizes, so there is no magic formula that will work for everyone. But the first thing everyone can do is learn about the different asset classes (also known as types of investments).
Remember, always do your research to work out what is right for you. Seek independent financial and tax advice and always check the T&Cs, fees and changes and eligibility criteria of any investment.
Curious about asset classes and what they mean? Let’s jump into some of the main ones you could consider.
Jargon note: An asset class is an investing term that basically just means the type of investment or a group of investments that have similar elements. Things like risk, expected returns, trading markets or the laws and regulations that govern them.
No, we don’t just mean the jingling kind. Cash as an investment asset really refers to anything that can be converted to cash pretty quickly, with a low risk of losing value. So, think high-interest savings accounts or cash managed accounts.
Objective: Accumulating wealth to a specific amount (generally $10k or less) via earning interest
Timeframe: Short term (2-3 years)
Risk Appetite: Low
It’s important to note that while cash feels like the safest option, that’s not always the case. Fluctuating inflation levels and even tax on interest can eat into your earnings over time, so holding cash for long periods may actually make you go backwards.
You currently want to be earning over 8% on your investments to keep pace with the cost of living, so the amount that you need to earn will change over time depending upon prevailing inflation rates.
Ah, the dream of a picket fence and a home to call your own. Yes, buying into the housing market is another form of investment. But you’re not limited to the roof over your own head.
Investing in property can include houses and units that you rent out, commercial or industrial properties, or even vacant land.
Objective: Ability to earn income (ie. Rent), or have an asset that may increase in value over time
Timeframe: Medium to long-term (generally 5 years and up)
Risk Appetite: Medium risk (depending on asset type, timeframe to sell and market volatility)
Want to invest in property but don’t have enough for a deposit saved up? You could explore investing in a property trust. This allows you to pool your money with others to invest in a range of properties for as little as $1,000 - $5,000, depending on the trust. Team effort.
Shares (or stocks) are units of ownership in a company. Essentially, they allow you to invest in the long-term success of a business – without having to do any of the work. Some of the company profits may either be paid out to you in the form of dividends (a sum of money paid regularly to shareholders of a company) or the company may choose to reinvest back in the company.
However, it’s important to note that just because a company is profitable, it does not mean they will pay out the full amount of profit – their priority will be on retaining funds to grow the business.
With shares, you can either purchase them directly through a broker or trading platform where you hold the specific shares, or you may hold them indirectly by investing in a fund (a pool of investors where the fund itself holds shares in a range of companies).
Much like property, shares are considered a growth investment – you can earn income from the dividends paid on the profit the company makes, and your investment itself may increase in value over time too.
Objective: Potential to benefit from growth , and dividend payments
Timeframe: Long-term
Risk Appetite: High risk
The share market is highly volatile and individual businesses can be affected by both internal controversies and global crises. Buying and selling shares to try to make large profits in the short term is incredibly risky.
The cognitive bias ‘illusion of control’ can also lead us to making riskier decisions as we feel we have more control over the outcomes than we do.
For more security, you generally want to be able to hold onto your shares to ride the market through any major waves and cash out on a high note in the future.
Instalment warrants are an option offered by some financial institutions and brokers, allowing you to purchase a stake in a business and pay it off in instalments.
This can help you to acquire shares even if you don’t have the full capital at the time – but watch out, much like a loan there will be repayment requirements and interest rates to take into consideration so they can be quite risky.
When selecting which asset classes to invest in, make sure you do your research – we often make decisions based on our most recent or most vividly remembered experiences. Because they feel more immediate, we think they’re more relevant, rather than looking wider or back over a longer time period. But this mental bias can lead us to overlook long-term trends or better options.
Remember: Investing is generally a long-term game, so a mix of investment types in both low and high-risk categories (more on these below) will help you to be a safer and more effective investor.
Passive income is the money that you earn off your investments without actively selling or trading them. This can be the interest earned on savings, rent from an investment property or dividends from your shares. While every person’s situation is different, you may choose to re-invest this income to earn more in the long term. Or if you’re wanting to live off the income generated by your investments (such as in retirement) you can choose to spend what you’ve earned while keeping your initial investment in place.
This type of investment income is different to actively generating income from your investments by buying and selling frequently, or as the market moves through its cycles. Your return from passive income is usually a smaller amount but is consistently delivered to investors.
Now you know all about asset classes, it’s time to align these with your goals. To do that:
Make a list of your short and long-term objectives including how much money you think you’ll need and how long you have to get there
Make note of the asset classes that align with each of your goals
Take one action today to help get you started – this can be opening a term deposit account, signing up for a trading platform, reaching out to a broker for more information, or even just reading the latest from the Australian Stock Exchange (ASX).
The information set out above is general in nature and has been prepared without taking into account your objectives, financial situation or needs. Before acting on the information, you should consider whether the information is appropriate for you having regard to your objectives, financial situation and needs. By providing this information ANZ does not intend to provide any financial advice or other advice or recommendations. You should seek independent financial, legal, tax and other relevant advice having regard to your particular circumstances.