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 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
- Property securities, Australian and international shares
In a nutshell: growth assets focused on capital growth and income.
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
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.