David Ooi, Director – Capital & Business Advisory
You’ve just saved or inherited a large sum of funds, and now you're ready to make your money work for you. The initial stage in investing any sum of money involves evaluating your short and long-term financial goals, determining potential needs for accessing funds, and assessing your risk tolerance level.
Diversification:
Irrespective of the amount of money invested, it’s important to bear in mind that diversification is always a good approach, this is done to avoid an “all eggs in one basket” approach that can lead to major volatility and potential losses in your portfolio.
By spreading your funds across a range of asset classes, you can reduce the impact of any single investment underperforming. This helps cushion your portfolio against market volatility and unforeseen events, improving the likelihood of achieving long-term growth.
As such, let's delve into a handful of asset types that can serve as pillars of a well-diversified investment portfolio:
1. High-interest savings accounts / Term Deposits
For short-term investment options, a high-interest savings accounts are an option to consider, these allow your money to grow while remaining accessible until needed.
Currently, several Australian banks provide savings accounts offering interest rates varying from 4% to 5% per annum. It's important to note that these interest rates frequently fluctuate in accordance with shifts in the official RBA Cash Rate. A decrease in the cash rate typically results in a decrease in the yield of the corresponding savings account.
As such, many investors prefer term deposits due to their simplicity. With a term deposit, you invest a sum of money at a fixed interest rate for a specific period, known as the term. Upon the end of the term (maturity), you receive your initial deposit along with the accrued interest.
Importantly, term deposits are generally considered illiquid investments. While some providers may offer options for early termination or withdrawal before maturity, they often come with associated costs and fees, impacting your overall return.
Additionally, when factoring in taxes and inflation rates, term deposits may potentially result in a negative real return. In other words, even though the overall return on the investment might be positive, if the inflation rate is higher than the overall return, the purchasing power of the investment decreases over time. This means that the investor effectively loses money in terms of what they can buy with the returns earned on their investment.
2. Equities
Investing in individual stocks or Exchange-Traded Funds (ETFs) within equity markets can provide opportunities for wealth accumulation over the longer term. Investing in individual stocks on the ASX or US markets represents ownership in specific companies, presenting opportunities for capital gains or income through dividends. However, they also come with elevated risks linked to the performance of the underlying company. On the other hand, ETFs provide a diversified portfolio of assets, granting exposure to broad market indices or sectors, thus mitigating risk across multiple assets.
Despite their potential for strong returns, equity investments are subject to greater levels of volatility and risk. Hence, investors should adopt a prudent approach and integrate them into a well-diversified investment strategy with a commitment to a long-term investment horizon.
3. Bonds
Investing in bonds, whether within the Australian context through the Australian Securities Exchange (ASX) or internationally, provides an avenue for investors to generate income and preserve capital.
Bonds represent debt securities primarily issued by governments or corporations, offering fixed interest payments over a specified period until maturity. Australian government bonds, for instance, are generally considered low-risk investments, backed by the Australian government's creditworthiness, while corporate bonds may carry higher yields but also higher credit risk. Additionally, investors can access bond exposure through bond ETFs, which provide diversification across a range of bonds.
While bonds typically offer lower returns compared to equities, bonds, provide a level of security that can help safeguard investors' capital, making them a crucial component for those seeking a balance between risk and return.
4. Alternative Investments
Investing in alternative assets, such as real estate, commodities, and private equity, offers diversification beyond traditional stocks and bonds. These investments provide unique opportunities for capital appreciation and income generation, with returns often uncorrelated to broader market trends.
However, it's important to note that alternative investments generally have low levels of liquidity compared to traditional assets. Real estate, for example, may take time to sell, and private equity investments often have lock-up periods during which investors cannot easily access their capital. This illiquidity can impact an investor's ability to quickly convert assets into cash.
Speak to an Adviser Today
With an extensive list of investment options at your disposal, it's important to seek expert guidance in crafting a diversified portfolio that reflects your financial goals, objectives, and risk tolerance.
A financial advisor can assist you in evaluating your investment objectives, assessing your risk profile, and creating a well-rounded portfolio tailored to your requirements.
In conclusion, if you find yourself with a sum of money and you’re ready to invest, remember that diversification is key to building a resilient and profitable portfolio. By spreading your funds across a mix of asset classes, including some mentioned above, you can help mitigate risk and optimise returns over the long term.
Don't hesitate to reach out to one of our qualified advisers today to embark on your investment journey and secure your financial future.
