INVESTINGStart Saving
The BIG thing about wealth creation and planning for retirement is that it is not an immediate issue. So what usually happens?............Nothing! Do any of these statements sound familiar?
“I’ll start planning for my future ……” • when the mortgage is under control
• when the kids have moved out
• In another 5 years
• after I get the car fixed/replaced
• after I get a pay rise
Some Types of Investment Risk - Market Risk – The risk that the share market enters a Bear market
- Specific Risk - The risk that an individual share has a correction
- Financial Risk – Gearing or leverage ie borrowing to buy an asset or debt in a specific company
- Liquidity Risk – Cannot buy or sell an asset in a thin or il liquid market
ASSET CLASSESWhen looking at what specific areas you may invest in, there are four major categories of investment which are called “asset classes”. The Asset classes are: - Cash – represents liquid funds that are held through a bank. Cash usually earns the lowest return over the long term, but it is a safe short term investment.
- Fixed Interest – pays a regular amount of interest at a set rate for a specific period of time. This includes bonds, mortgages, and hybrids.
- Property – this includes listed, unlisted, and direct ownership of residential, retail, industrial, and commercial property. Various managed funds allow for investment in Australian and overseas property assets.
- Shares – ownership in listed companies such as Telstra, BHP, and the banks. It also includes overseas listed companies. Shares have traditionally given the best long term returns with the most short term variability in returns.
Each asset area is important in its own right and has advantages and disadvantages as a specific investment. The best structured investments use a mixture of all four types to obtain what is called ‘diversification’ – a common method of decreasing risk. The different nature and strengths of each specific asset class can be used to also to structure a portfolio to meet an investor’s particular needs e.g. preference for low risk or a short-term focus versus a long-term focus. PORTFOLIO TYPESThere are a number of different portfolio types that can be built depending on the clients needs and goals. A cautious portfolio will hold high levels of Cash and Fixed Interest assets and low levels of Shares and Property compared to a High Growth portfolio. Some examples of asset allocation are listed in the following table. Portfolio Type | Cash | Fixed Interest | Australian Shares | International Shares | Property | Cautious | 10% | 70% | 10% | 0% | 10% | Conservative | 10% | 50% | 15% | 5% | 20% | Balanced | 5% | 25% | 35% | 15% | 20% | Growth | 5% | 10% | 45% | 30% | 10% | High Growth | 5% | 0% | 50% | 35% | 10% |
INVESTMENT STYLESValue Investing Value Investing revolves around selecting stocks that have good long term value, but poor short term performance. The following table shows how the market reacts to news for poorly performing and strongly performing stocks. News | Stock priced for failure | Stock priced for perfection | Good | large rise | minor move | Bad | minor move | large fall |
By taking a ‘value' and ‘contrarian' approach, one can aim to steer away from the crowd and reduce risk. This approach is not new and there are many fund managers who have long term success by following it. The bottom line is that investors consistently overvalue the so-called ‘best' stocks and undervalue the so-called ‘worst' stocks. Growth Investing – Does best in strong markets. Value Investing – Does best in weaker markets. It performs best over a full market cycle. | 
