how to choose investments

In order for your investment plan to be successful, you need to choose investments that match your goals, your timeframe, and your capacity for investment risk. This wiki entry will help you to choose suitable investments.

Investments are usually described as either ‘defensive’ or ‘growth’ investments.

Defensive investments are lower risk. They seek to produce income with little to no risk of losing capital. This type of investment includes cash and fixed interest investments like bonds.

Because of the lower risk, defensive investments are good for your short-term financial goals (eg less than 3 years). Defensive investments are also suitable as a tool to diversify your portfolio.

Cash: Includes high interest savings accounts and term deposits. Protects your wealth and diversifies your portfolio. Lower average returns. Very low risk of losing your money, suitable for short term investing.

Fixed Interest: Includes government bonds, corporate bonds and capital notes. Earns a steady rate of income. Useful for diversification. Average return over last 10 years: 3–4% pa. Low risk of losing any money. Suitable for short term investments.

Growth investments are considered higher risk but provide higher returns compared to the defensive investments above. They provide capital growth (which can be volatile at times) and income (for example, dividends from shares or rent from an investment property). Growth assets are suitable for longer-term investing and longer-term goals.

Property Includes residential and commercial property. Property investment seek to earn steady rate of income (rent) and achieve capital growth. Average return over last 10 years: 6.3% pa. Medium to high investment risk. Suitable for longer term investing, 5 years at a minimum.

Investing in Shares is investing in a company. You get to share in the profits of the company. Seeks to achieve capital growth and some income via dividends. Average return over last 10 years: 6.5% pa for Australian shares. High risk, suitable only for long term, at least 5 years.

Alternative Investments includes private equity, infrastructure, commodities and other investments that don’t fall into the traditional investment types listed above. Most aim to provide capital growth, and some have the potential for income. Most alternative assets are high risk. Returns differ depending on the type of alternative investment.

Researching Investments

Before deciding to invest, you need to understand:

– How the investment works.

– What returns and what type of returns are expected to be earned (eg capital gain and/or income).

– Relevant investment risks

– Fees for buying, owning and selling the investment

– The appropriate time-frame for the investment

– Legal and tax implications of the investment

– How diversified is the investment, and how does it fit with your other assets?

You should be able to find this information in the product disclosure statement (PDS). 

When it comes to investing you need to decide whether you’ll do it yourself, or pay a someone else to do it for you. Both have their pros and cons, and you can do both.

The advantage of investing yourself is that you’re in control of all the decisions. It may be cheaper. The major risk is that you can over-estimate your expertise and make mistakes. If you invest directly, it’s important to plan and put in the time to research your investments. You should also keep track of how they’re performing.

If you invest in a managed fund, exchange-traded fund (ETF) or a listed investment company (LIC) your money is pooled with other investors. A professional investment manager then buys and sells investments on your behalf. When you use a professional, you benefit from their skills and knowledge to make investment decisions. But you have to pay for this service, which include management fees, administration fees and entry and exit fees.

A financial adviser can help you set your financial goals, understand your risk tolerance and find the right investments.

If your goal is to save for retirement, contributing more to super is generally the best way to do this. To learn more about this, please read the MoneySmart article about investment options for your superannuation.