Do you have an existing loan, such as a personal loan, credit card or other debt? If the answer is yes, it’s usually best to pay these off first before purchasing additional assets, as it could affect your ability to get a loan or your new investment could lose money that you may need to pay off your existing debts.
Having a plan can help you clarify what you’re doing and why:
- What are you planning to do with your investment?
- Are your goals short-term (0 to 2 years), medium-term (3 to 5 years) or long-term (5 years or longer)?
- How much will you invest?
- What is the expected return on the investment and does this come from income (such as rent or dividends) or capital growth?
- How long do you need to invest to get this expected return?
- How long will it take to sell the investment?
- How much does it cost to buy and sell the investment?
- How much tax will you have to pay on earnings (such as income and capital gains)?
- If you’re on the Age Pension or receive concessions, will this impact your eligibility or payments?
- What risks does the investment involve and are you comfortable with taking these risks?
There are many different types of asset classes you can invest in, including shares, property, ETFs, bonds, managed funds, cryptocurrency, commodities, and cash.
Before you invest, research the risks and returns for each and how they fit in with your plans, risk tolerance, and goals.
Risks that can affect the value of your investment can include:
- Concentration risk: This is where you have a portfolio with little diversification (e.g. only property or only shares). If one of these investments or assets performs poorly, it can have a much bigger impact on your overall wealth than if it is just a smaller part of your portfolio.
- Currency risk: The fluctuations of the Australian dollar and international markets can impact your investments and returns. This is especially true if your investment is based overseas or relies on overseas currency.
- Gearing risk: If you borrow money to invest and experience losses, you not only lose the value of the asset, but will still have to pay back the balance of the loan and interest.
- Inflation risk: If your investment isn’t keeping pace with inflation, then it is essentially losing value over time. For example, if you have $100,000 cash in a high-interest savings account earning 0.56% interest, but inflation (which affects the cost of groceries, fuel, and other goods) is 3%, your money is losing 2.44% of its value over time (the gap between your interest rate and inflation).
- Interest rate risk: We are currently experiencing historic lows for interest rates, but with the RBA, banks, and financial experts predicting a rise in the near future, it could present a risk to your investments. If you have your money in a high-interest savings account, this may see greater returns than it has in recent times but could present issues in the future if you take out a variable interest rate loan for a property for example.
- Liquidity risk: If your asset will take time to sell (such as shares or property), this could present a risk if you need the money fast. This is why it is often recommended to have 3 to 6 months’ worth of emergency savings to fall back on.
- Market risk: If your investment is subject to high market fluctuations due to economic changes or other events (such as shares, property, or cryptocurrency), then this could present a risk to the value of your investment. This is why higher-risk assets are generally better to hold onto over the long-term to ride out market fluctuations.
- Sector risk: If you have invested in a specific sector, this could present a risk if an event happens that affects that sector (such as tourism and aviation during the pandemic).
- Timing risk: While the advice isn’t to try and time the market, if you buy your investment during a high cycle in the market, you are at greater risk of capital losses or lower returns.
Diversification prevents you from putting all your eggs in one basket, so to speak. Spreading your money across and within different asset classes can help better manage risk.
There are two key types of asset classes: defensive and growth. Defensive (low risk, low return) includes high-interest savings accounts, term deposits, and bonds, whereas growth assets (higher return but high risk) include shares, property, managed funds, and cryptocurrency.
The way you structure your investment portfolio will depend on your risk tolerance, financial goals, and timeframe.
For short-term goals, lower-risk investments that you can easily access are usually recommended (such as high-interest savings accounts, term deposits or even government bonds).
Longer term goals usually fit better with assets such as shares or property which generally take more time to see returns and to ride out any short-term falls in value.
Diversifying your portfolio across asset classes will help you from losing too much if one asset class loses value.
Once you’ve made the leap, it’s important to see how your investments are performing over time. Check your investment plan once a year to see if they are performing in line with your goals, risk tolerance and timeframe.
For defensive assets, you shouldn’t expect to see the value of your investment change too much over time. Usually these types of investments don’t require close monitoring.
Growth assets, however, are more volatile and should be checked more often. These should be checked at least once or twice a year to assess performance. Try not to check too frequently or this may lead to selling your assets when markets fall instead of sticking to your investment plan and timeframe.
Shares: You can monitor performance through the Australian Securities Exchange or online broker platform, as well as semi-annual and annual reports.
Managed funds: Review unit prices, fund updates and annual statements (which can be done on the fund’s website), or track fund returns and performance against other similar managed funds or it’s own benchmark through websites including Morningstar and InvestSmart.
Property: Use real estate websites such as Realestate.com.au or Domain to see prices of recently sold properties. Monitor auction clearance rates online or in newspapers, or review housing price updates by Core Logic and the Australian Bureau of Statistics.