When making an investment decision, the investment you choose needs to work as part of a balanced portfolio that meets your tolerance for risk, while providing an attractive return on investment that allows you to work towards reaching your financial goals.
If you haven’t created one already, the best place to start in ensuring you will get the return on your investment you desire, is to closely follow a financial plan. Financial planning can help you to create an investment strategy suitable to you and with the help and advice of a Licensed Financial Adviser, you can use that investment strategy to make investment decisions according to the timeframe you have available, and your tolerance for risk.
Secondly, it’s important you understand the different investment options you have available to you, how they work and what type of return on your investment they can provide. With that in mind, we’re taking a look at some of the common – and not so common – investment options available.
Whether you’re investing through direct property ownership or through a managed fund or property trust, property investment has long been the Australian dream.
As a growth investment, property is generally invested in over the long term, as this allows investors to ride out the ups and downs of the property market. According to the ASX/Russell Investments 2018 Long-term Investing Report1, Australian residential investment property averaged 8.00% in gross returns per annum over 10 years to December 2017.
Generally considered a higher risk asset, equities can be vulnerable to sudden fluctuations in price. This means they can provide high returns, but can also provide substantial losses. Obviously, as each equity performs differently, the return on investment will vary.
Overall, the ASX/Russell Investments report showed that Australian shares averaged 4.00% in gross returns per annum over 10 years to December 2017. If this sounds lower than you may have been expecting, it’s worth bearing in mind that this period of time encompassed the GFC.
3. Fixed Income Investments
Considered a defensive investment rather than a growth investment, fixed income assets are often seen as providing a relatively stable and reliable return. This type of investment can include government and corporate bonds, which essentially allow investors to lend money to these entities, in return for interest paid out in regular installments.
While this investment type is typically thought of as lower risk, according to the ASX/Russell Investments report, Australian bonds averaged 6.20% in gross returns per annum over 10 years to December 2017.
Cash investments, such as savings accounts and term deposits, tend to offer a low risk investment option, which means they also tend to generate lower returns.
The ASX/Russell Investments report showed that cash averaged 3.60% in gross returns per annum over 10 years to December 2017. However, due to its liquidity – and the importance of diversification – cash can play a vital role in any investment portfolio.
Alternative Investment Options
With the four main types of investment covered, let’s take a quick look at alternative investment options and their potential return on investment.
1. Peer to Peer Lending (P2P)
You as the investor are matched to a borrower, to then lend them money in return for interest paid out on the loan. P2P lenders match you with potential borrowers, taking a percentage of the interest charged on the loan, in return for carrying out credit checks and in some limited cases, providing funds should the borrower fail to repay the loan.
As loans are fixed, the potential returns on P2P lending are known ahead of time. Typically, the longer you invest, the higher the risk and the return you receive, with returns ranging from per annum rates of 3% (lower risk) – 15% (higher risk).
2. Exchange Traded Funds
Traded on the Australian Stock Exchange, Exchange Traded Funds or ETFs are investment funds that mimic the returns of an asset class like Australian or global shares. They can provide a cost-efficient way to gain exposure to a diverse range of assets, with risk – and return – varying according to the asset class the ETF invests in.
Lower risk ETFs that invest in fixed income may have a potential return of 4.00% per annum, while higher risk ETFs that for example invest in emerging economies, could return 10%-20% p.a.
3. Equity Crowdfunding
Having only been allowed in Australia since September 2017, equity crowdfunding is a relatively new type of investment, allowing investors to own shares in companies not listed on the ASX. Investment is done through equity crowdfunding platforms, where investors choose to buy shares in early stage businesses.
Getting in early can provide the potential for huge rewards, as these early stage businesses have the potential for massive growth. But, with that potential for higher return on investment also comes much higher risk.
For those of us looking to build wealth, we’re lucky to have a number of investment opportunities at our finger tips. With that in mind, it’s worth remembering that past performance is not a reliable indicator of future performance, regardless of the type of investment.
Great care is needed when making an investment decision, which means if in doubt, it is always best to seek advice from a licensed financial adviser.
The material on this website is intended only to provide a summary and general overview on matters of interest. Trilogy is only licensed to provide general financial product advice on its own products and does not consider your objectives, financial situation or needs when providing any information or advice. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision.