Depending on your income and savings, investments could be an important part of your financial plan and strategy.
The range of investment options is broad and includes:
All investment involves a certain level of risk: some will be high, such as shares and commodities; others will be low, such as government bonds and term deposits (i.e. cash).
Your advisor can help you determine your ‘risk profile’ – that is, how comfortable you are with risk. There’s no point in having a potentially lucrative investment portfolio, if you’re going to lie awake every night worrying about its security.
Once you know your financial situation, you’ll be able to start drawing up an investment strategy.
The first thing most advisors will suggest is paying off any expensive personal debt such as credit cards. You might also be able to consolidate other personal debt into your home loan. That way you can benefit from lower interest rates and fewer fees.
The next step is to design your investment strategy. A good way to start is by looking at how your super balance is invested.
Your super fund probably offers a number of investment options, including balanced, growth, high growth, sustainable etc. and your fund’s website will usually have a page dedicated to these products, showing a breakdown (usually as a pie chart) of the investments. While it’s unlikely you’ll want (or have the means) to diversify as much as your fund does, they give a good picture of how different strategies work. For instance, a conservative option will show a heavier investment in cash and bonds, while a growth option will probably show a preference for Australian and international shares.
All good investment strategies have a level of diversity built in. That way, your investment risk is spread over different sectors, so that if one sector underperforms, your entire portfolio doesn’t suffer.
A sound investment mix would generally comprise both defensive and growth investments. These include:
Defensive – lower risk, lower growth potential
Growth – higher risk, higher growth potential
Even within these investments, it’s wise to diversify, for example, buying shares in a range of industries, or investment properties that attract different target markets.
Some investments, such as direct property require a high initial capital outlay, while others, such as term deposits and shares can be relatively inexpensive to get into. Your financial advisor will give you an idea of how you can best enter the various investment markets.
Once you establish an investment plan (preferably with the help of an independent financial advisor), it’s often useful to discuss it with your partner or family – especially if any of them are dependent on your income.
If it all seems too much don’t worry, each fund has a default investment option which you are likely to be in if you haven’t selected an investment option. The default investment options vary, however, they are usually called balanced as they sit between growth (more aggressive and riskier) and defensive ( conservative and less risky) investment.