If you are just starting out as an investor there is a lot of information you will need to absorb and understand. It is important to make sure you seek out the best advice as you travel through your investing journey.
The are four main asset classes;
- Cash – This includes money in your bank account as well as investments in bank bills and similar securities and short term deposits up to 12 months. Typically cash investments provide stable, low risk income in the form of regular interest payments and are short term.
- Fixed Interest – Includes term deposits, debentures (types of investments that pay interest), mortgages, and government and corporate bonds. The income return is usually in the form of regular interest payments for an agreed period of time. Generally fixed interests are one to three years.
- Property – You can invest in a property either directly (eg when you buy a home or commercial property) or indirectly (eg by purchasing units in a property trust that is listed on a stock exchange). This asset class includes residential, commercial, retail, hotel and industrial property and is often a medium term of three to five years.
- Shares – Shares represent part ownership of a company and are bought and sold on a stock exchange. Returns usually include capital growth as well as income from dividends. You can choose to invest in Australian shares, Global shares, or a mix of both and are more of a long term investment of five to seven years.
These main asset classes can also be separated into two broad groups – defensive and growth investments.
- Defensive investments are cash and fixed interest investments which aim to provide investors with regular income at relatively low risk. They generally experience only slight fluctuations in investment returns and values over short periods. The downside of defensive investments is that they usually do not grow in capital value and returns are generally lower.
- Growth investments are property and shares and they aim to increase the value of the capital invested. Investment returns are expected to fluctuate over the short term but have the potential to produce higher returns over the long term.
All investments provide a certain level of return and are subject to a certain level of risk. What this means for you is that as well as making money on your investments there is also the possibility that you could lose money or make less money than you anticipated. As a general rule, the larger the potential investment return, the higher the investment risk and the longer you need to remain invested to reduce that risk. The amount of risk involved with an investment can be managed by matching it appropriately with the length of time you have available to invest and your tolerance towards volatility or fluctuations in returns.
The level of risk an investor takes relative to the investment return they expect to receive is sometimes known as the ‘risk to return ratio’.
The chart below provides more detailed information of each asset class.
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