Whether you are an experienced investor who has lived the rise and fall of markets or someone who is taking their first steps, it is important to identify and connect with your investment philosophy. Why are you investing? What do you want your money to do for you? What returns are expecting? What are you willing to risk?
As an investor, it is also important to be aware of the Psychology of Investing and how that can impact your decisions. Even the most astute investor with all the time in the world to research can struggle to remain clear and calm when faced with tough choices and what can be a volatile performance environment. So what are the principles of successful investing?
Each investment platform comes with its own inherent set of ‘pros and cons’. When you are clear about your own investment needs and goals, picking the right set becomes clearer. So what types of investments are out there?
If you put your money into cash investments (including savings accounts and term deposits), the returns will often be lower in comparison to other investment products. However, these types of investment options typically provide stable, low-risk income in the form of regular interest payment, so they may be a good option if you’re risk-averse or working to a short timeframe.
Fixed interest investments (also known as fixed income or bonds) usually have a set investment period (e.g. Five years) and provide predictable income in the form of regular interest payments. They tend to be less risky when compared to other types of investments. They are issued by governments and companies in Australia and internationally.
If you purchase shares in Australian or international companies, you’re essentially buying a piece of that company, making you a shareholder. If the shares of the company grow in value, the value of your investment will also increase, and you may receive a portion of the company’s profits in the form of dividends. However, if the share price falls, the value of your investment will also fall. It’s also worth keeping in mind that you may not receive any dividends at all.
In a managed fund (also known as a managed portfolio), your money is pooled with other investors on your behalf by a fund manager. The amount of money you invest is equal to a set number of units and any growth or earnings is then divided between all investors depending on how many units each investor owns. Any income generated on these earnings will also be subject to tax based on the individual income tax rate of the owner. It’s important to keep in mind that putting your money into a managed fund won’t necessarily guarantee you a return.
An ETF is a type of managed fund that can be bought and sold on an exchange, such as the ASX, and which tracks a particular asset or market index. ETFs are usually ‘passive’ investment options as the majority of these investment products track an index, and generally, don’t try to outperform it. This means the value of your investment in an ETF will go up and down in line with the index it is tracking.
Like a managed fund, your money will generally be pooled with money from other investors, with an investment manager overseeing the funds. The main point of difference is the way earnings are taxed. If you hold an investment bond for at least 10 years, you won’t have to pay additional tax on any profits that you’ve made when you eventually sell (or redeem) your investment.
A popular option for retirement, annuities provide a guaranteed income regardless of what’s happening in financial markets. These can be in the form of a series of regular payments either over a set number of years (fixed-term) or for the remainder of your life (lifetime annuity).
You can purchase an annuity through your super, through insurance, or with ordinary savings. It’s important to note though, that if you’re using your super money for the purchase, you won’t be able to access the funds until you reach your preservation age.
A REIT is a type of property fund listed on a public market, such as the ASX, in which investors can purchase units. Similar to a managed fund, your money in the fund is then pooled and invested in a range of property assets, which may include commercial, retail, industrial, or other, property sectors.
REITs can provide investors with exposure to the property market in a way that is more diversified – and potentially more cost-effective – than buying a single property.
What is your ideal investment portfolio? Before putting your money into any investment option it’s important to make sure you understand and are comfortable with, the level of risk involved, the investment timeframe, any potential costs involved, and how the product could help you reach your goals.
It’s also important to look into any potential legal and tax implications, as these can vary depending on the type of investment you make.
If you already have investments, how healthy are they? Now is the perfect time to assess them with our Investment Report Card.
What you need to know
This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.
1 ASIC’s MoneySmart website, ‘Annuities’
©AMP Life Limited. First published November 2018
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