Investment Mix

Bonds, property, cash or shares? Choosing an investment mix

A little knowledge can go a long way when determining which investments are appropriate for your tolerance to risk, investment goals, timeframe and circumstances. It is therefore important to have some idea of how your ‘investment mix’ is created and where your money is going.

The most common asset classes represent different types of investment – cash, shares, fixed interest and property. Each asset class has a different level of risk and return, and therefore perform differently over time.

Risk and return
When you choose an asset class for your investment, it’s important to understand how it works, and to be clear about investment timeframes so you’re not setting yourself false expectations of how your money should be tracking over time.

When focussing on structuring your investment portfolio, remember investments that have provided higher returns over the longer term may produce a wider range of returns over the short term. This may mean these investments may not help you to meet your short term investment goals.

Let’s look at the different types of asset classes and the risk level involved.

1. Cash and fixed interest

In a nutshell: defensive assets, such as cash or fixed interest, are generally aimed at providing stable, more consistent returns.

  • Cash
    Cash refers to bank bills or other similar securities, which generally have a short term investment timeframe and provide more stable returns and a narrower range of returns over the shorter term than some other investments such as shares.

Risk level: Low risk

Minimum suggested timeframe: No minimum

  • Fixed interest
    These are securities such as government and corporate bonds and generally operate in a similar fashion to loans. You can get a regular interest payment from a bond for an agreed period of time and the value can go up and down, depending on changing interest rate levels. You get your initial outlay of cash back when the bond matures. Bonds have historically offered returns that are generally more consistent, but lower, than shares. They still contain some level of risk higher than a cash investment.

Risk level: Low–medium risk

Timeframe: Minimum suggested 3 years

  1. Property securities, Australian and international shares

In a nutshell: growth assets focused on capital growth and income.

  • Property
    Property can be bought directly or you can buy it indirectly via property securities. Property securities are usually listed on a stock exchange and traded in a similar way to shares. Depending on the specific security, each property security can represent an investment in a real property in various sectors including retail, industrial and office.

Risk level: Medium–high risk

Timeframe: Minimum suggested 5 years

  • Shares
    You can buy shares in companies locally and/or internationally. Your money buys you a stake in the company that can be traded on a stock exchange. This can be done directly, or through a managed fund, which will pool your money with other investors to buy shares in various companies.

The value of shares tends to fluctuate and shares are considered to be more risky than other asset classes. However, over the longer term, shares have historically tended to outperform other asset classes.

Risk level: High risk

Timeframe: Minimum suggested investment 7 years for both Australian and international shares.

What To Do With A Windfall

Four tips on what to do with a windfall

If you were lucky enough to land a windfall, before you rush off on that long dreamed of holiday, here are four practical considerations:

  1. Reduce your debt

The most financially sensible thing you could do, is pay off debt. Before doing anything else with you cash, it would be wise to pay off loans which charge you the highest rates of interest, such as credit cards, car or personal loans, store cards or short term loans.

Only then should you consider paying off your mortgage, in full or in part, because your mortgage is likely to be charging you the lowest interest rates. Apart from the savings you’ll make from lower interest payments, getting rid of debt could also eliminate financial stress and allow you to focus on smarter financial decisions for your future.

You should speak with a financial adviser about your current situation. It doesn’t matter what stage of life you’re at, how much money you have, or how much advice you need

  1. Plan for retirement and build up your super balance

You should consider taking advantage of non-concessional contributions and build more of your wealth within super, rather than having it all invested in your own name in the bank. Non-concessional contributions refer to after-tax amounts which are indexed each year.

Under current rules, you could contribute $180,000 in non-concessional contributions. Further, and subject to regulatory compliance, if you are 64 years old or less anytime in the financial year and you make a non-concessional contribution, it would trigger a ‘bring-forward’ provision, and you could contribute up to $540,000. This would result in a significant tax saving on your investment earnings, but it would depend on your personal income levels. Keep in mind, though, that the downside of building up your super is that you cannot access the money until you stop working or retire (subject to meeting a condition of release).

  1. Diversify your investments

Keeping large sums of money in the bank at current term deposit interest rates may not be the best investment in the long term. You could work out what large capital expenses you may have over the next three years and leave this sum in the bank, but the remainder could be invested in a more growth-oriented manner, depending on your appetite for risk.

If you have already purchased an investment property, you could consider building up investments in Australian shares, international shares and other asset classes to diversify your investment portfolio.

You could also look at a managed fund that is appropriately diversified across a number of asset classes, but a good portion could be in Australian shares which aim to deliver the growth that can be achieved over the long term with this asset class.

  1. Find a financial adviser

You should speak with a financial adviser about your current situation. It doesn’t matter what stage of life you’re at, how much money you have, or how much advice you need, it could be beneficial for you to sit down with a financial adviser and work out your short and long term financial goals and aspirations. For more on how you could benefit from financial advice, see The right advice can make all the difference.

Mortgage Paid?

Mortgage paid? Save for the future

Now that you’ve paid your mortgage off, here are three ways to start thinking about building wealth for tomorrow: 

  1. Invest regularly in managed funds

Paying off a mortgage teaches you the healthy financial habit of saving a certain amount of your pay check each month. Why not keep up that discipline with a regular investment into a managed fund?

Managed funds can help you gain exposure to a diverse range of assets, even for a relatively small investment. You’ll also get the benefit of the expertise of the fund manager who selects and manages the investments — so there’s no need to research and choose stocks yourself.

By regularly investing the same amount of money over time, you’ll be employing a strategy known as ’dollar cost averaging’. Dollar cost averaging is an investment technique where money is invested at regular intervals, rather than in a single transaction. By investing on a regular basis, you don’t need to rely on ‘timing strategies’ which aim to pick when a market has peaked or reached the bottom of a cycle.

You make regular contributions regardless of what the market is doing, which means sometimes you pay more, sometimes less for your investments. The differences in price even out over time.

Dollar cost averaging imposes investment discipline. It is useful to slowly build exposure to markets and smooth out the risks associated with market fluctuations.

It’s like buying $100 worth of apples every week — you get more when they’re cheap, so you end up with more cheap apples than expensive ones. Then, if apples go up in price, you’re investment should be worth more than you paid for it. However, the cost of apples will go up and down.

  1. Salary sacrifice into super 

Another good place to invest some of your income is into your super, through a salary sacrifice arrangement.

It’s easy to do — simply arrange for your employer (if this option is available) to pay part of your pre-tax salary into your super, along with the compulsory superannuation guarantee super payments they already make. There are limits to the amount you can contribute so ensure you seek financial advice.

Salary sacrifice may also be a very tax-effective strategy. That’s because it comes out of your pre-tax earnings, which means it may lower your assessable income. As a result, you could pay less income tax each year, while building your retirement savings.

What’s more, the money you salary sacrifice to your fund is taxed at just 15% within super. So if you’re in a higher tax bracket — for example, if you’re paying a marginal rate of 46.5% tax — this could reduce the tax you pay on this money by 31.5%.

  1. Diversify into other types of investment

Many Australians like to put money into investment properties. And there’s no question that this could be a great investment, with potential capital growth and rental income. But don’t forget the importance of diversification, spreading your investments across a range of assets, markets and industries — including overseas.

For example, international shares can give you exposure to rapidly growing emerging markets, such as China, Russia and India. You can also enjoy access to the developed markets, and some of the world’s most successful companies.

You may also want to consider investing in fixed interest assets, like term deposits or bonds, for more predictable returns.

Or if you are keen to stay in property, indirect investment property is another option. By pooling your money with other investors into a property fund, you can gain exposure to commercial or overseas property, at a lower cost than investing directly.

If that all sounds too hard, there are plenty of managed funds to choose from, that can provide instant diversification — without having to do the legwork yourself.

Making your money work for you

Investing can be complex, and everyone’s financial situation is different. So it’s important to get the right financial advice. A financial adviser can work with you to determine the most tax-effective investment to make the most of your surplus cash.