What Are Your Investment Choices?
There are many reasons to invest.
- Short term, looking to achieve a better result than simply saving.
- Mid-term, for a goal that you have set your sights on such as children’s education or a car.
- Long-term, to build a passive income stream or simply to earn enough to retire.
Regardless of what you are looking to achieve, there are a few basic things to understand.
- Diversification is key to ensuring that your investment risk is well managed.
- All investments have an element of risk. Long term, the risk of investing in growth assets is usually rewarded with a higher return than investing in lower risk assets.
- Inflation has a huge impact on the overall performance of your investments. It erodes the purchasing power of your money as the cost of buying goods is higher.
- Be careful of rash decisions during market corrections. Many investors crystallize their losses by panic selling and moving into a cash investment at the bottom of a market crash, only to miss the boat when re-entering the market once more.
- Asset allocation is extremely important. Getting the right mix of assets for your time frame can change your performance greatly.
What Is Diversification?
Simply put, diversification is the act of not having all of your eggs in one basket.
Most investment professionals would agree that it is one of the most important components to ensuring long term financial success. By spreading the risk of your investments across multiple investment asset classes the aim is to maximise your returns by investing in areas that perform differently in the same events.
Even within different asset classes there are often multiple methods which an investor can invest. Within the share markets you have sectors that have different characteristics such as financials, technology, health and resources. Property investors may choose between residential and commercial property and again the choices for other investments are wide and varied.
Another level of diversification can be achieved by ensuring that your investments are spread across these different market sectors.
Investing For Your Retirement
There are not many decisions more important than choosing the right investment strategy for your long term retirement savings, but few people are aware of exactly how important this decision can be.
a) Take for example, a young man who earns $50,000pa (rising with inflation at 3%) who has his employer putting his superannuation guarantee payments ($4,750pa) into a default balanced plan earning 6.8%pa. At the end of 45 years, his estimated retirement savings may be almost $2 million; though due to inflation his benefits may run short in just 20 years of retirement.
b) Compare this, then, to the same young man who decides that a growth investment might be more suited to his objectives. Being compensated for the extra risk that he takes, he may achieve a better return (let’s say 1%pa extra). The effects of these compounded increased returns is impressive. Almost $500,000 over his 40 year investment time-frame. And guess what? He is looking a lot healthier at retirement too!
Think of investing like driving a car.
If the road ahead is straight with no obstacles there is a good chance that you can take your eye off the road for a split second while you deal with something that has caught your attention. However, on a road with twists and turns you are heading for certain danger if you get distracted.
By continually reviewing where you are and where you are likely to be, we can help you to ensure that you can have a well-planned out and fruitful retirement.