What better way to finish off the financial year than with some consideration about investments? This week we'd like to broadly discuss the different types of asset classes and how these may or may not be right for you, depending on your circumstances and preferences.
Broadly speaking, there are four main types of investments available to everyone. These include:
1. Cash: money in the bank, savings accounts, and term deposits.
Pros: There's a lot of certainty around having money in the back. It's easily accessible and doesn't drop in capital value. This is a low-risk investment.
Cons: This type of investment also has low long-term returns, particularly in the current low rate environment. Cash also doesn't protect against inflation as there is no underlying capital growth unless you physically add more to it.
2. Interest: Government or semi-government bonds, or corporate bonds. These investments are issued by these organisations in an attempt to raise funds and with the promise of a fixed return to the investor.
Pros: This is still considered a "safe" investment but it generally offers a better return than straight cash investments. Long-term averages have fixed interest returns sitting at around 2% higher than cash.
Cons: Bonds can be traded on the bond exchange, meaning they can drop in capital value. Risks are also associated with lower grade bonds, meaning the issuing source may have difficulty in paying you back your initial investment amount.
3. Property: This class of asset includes residential properties, commercial or industrial premises, vacant land, and listed property companies.
Pros: We and see it and touch it! The property also gives you returns from two areas, both capital growth in the value of the property as well as some income by way of rent. These returns are generally higher than both cash and fixed interest. You can also use your equity in properties to borrow against.
Cons: Property values can drop and stay down for some time. There are also high transaction costs in buying and selling these, namely from stamp duty, capital gains tax and agent fees. Property can also often take some time to sell.
4. Shares: An ownership stake in a company is purchased by an investor, allowing them to share in the growth of that company as well as a portion of the profits, by way of dividends.?
Pros: This asset class gives the highest long-term rate of return, slightly edging out property. It's easy and cheap to sell shares if you need money quickly, and it's also simple to spread your share investment out, thereby reducing your risk. As an investor, you also generally receive your returns from two areas – growth and income.
Cons: Shares move up and down on a daily basis, thanks to the daily nature of the share market. They can drop in value quickly and take some time to return to previous highs. Because of the ease of buying and selling shares, some investors panic and sell when markets are down, thus crystallising their loss at the wrong time.
So, which one of these is right for you? For most people, the best investment strategy is to have a mix of all of the above. If your wealth accumulation is your goal, then having a focus on shares and property will be your best overall strategy. But if you can't stand the possible up-and-down movements of this type of investment, head towards the smoother ride from cash and bonds. Just remember, risk and return are related, and relatively good long-term returns can't be achieved without taking on some risk with your investments.
If you'd like to discuss your investment options more with us, just remember we're only a phone call or an email away.