Investments

An exchange traded fund (ETF) is a type of security that involves a collection of securities—such as shares—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies.  ETFs are in many ways similar to managed funds, however they are listed on exchanges and ETF’s trade throughout the day just like ordinary shares on the stock exchange.

A managed fund is a pool of money managed by a professional fund manager. Individual investors buy units in the managed fund, which is then managed by a funds management company for a fee.

Managed funds commonly invest in shares, property, bonds, fixed interest, cash or alternative assets and are a convenient and efficient way to achieve diversification and active management of your money.

Asset allocation is the process of balancing risk and return in a portfolio by investing across different asset classes.  The major asset classes include cash, bonds (fixed interest), property and shares.

Maintaining a diversified portfolio can help reduce overall investment risk by combining asset classes which don’t tend to move in the same at the same time and enhance returns over time.

Exposure to a certain amount of risk is a central element of investment decisions.  A risk profile is an evaluation of an individual’s willingness and ability to accept and take on risks. Risk profiling is a process adviser’s use to help determine a client’s tolerance to risk and is important for determining the appropriate asset allocation for that client.

As a general rule, the younger you are the greater amount of risk you can tolerate, and as you get older your risk tolerance reduces, but this is not always the case.  Your risk profile can change over time and should be reviewed periodically.

The main asset classes that people refer to are cash, fixed interest, property and shares.

The reason why it’s so important to understand asset classes is because they each have different levels of risk and return – the main criteria by which investors generally choose what they invest in.

Understanding what to expect from the different asset classes will help you decide which types of investments best suit your needs and investment timeframe.

Cash

Cash generally refers to investments in bank bills and similar securities which have a short investment timeframe.

Cash investments generally provide a stable return, with low potential for capital loss.

Fixed interest

Fixed interest securities, such as bonds, generally operate in the same way as loans.

You pay cash for the bond, and in return you receive a regular interest payment from the bond issuer for an agreed period of time. The value of the bond can fluctuate based on interest rate movements.

When the bond matures, the loan is repaid in cash. Historically, bonds have provided a more consistent but lower return than shares.

Property

Property generally involves buying a property directly or investing in property securities. Property securities do not involve buying a property directly.

Instead they can provide an indirect exposure to property and generally represent a part ownership of a company or an entitlement to the assets of a trust.

The company or trust may hold, manage or develop infrastructure and real property in sectors such as office, industrial and retail.

Property securities are generally listed on a stock exchange and are bought and sold like shares.

Shares

Shares represent a part ownership of a company and are generally bought and sold on a stock exchange.

Shares are generally considered to be more risky than the other asset classes because their value tends to fluctuate more than that of other asset classes.

However, over the longer term they have tended to outperform the other asset classes.

From 1 July 2018 there is a 5-year carry forward of unused concessional contributions under the annual $25,000 cap.  Key features include:

• Unused concessional contributions up to the cap of $25,000 pa can be carried forward for a maximum of 5 years.
• Your total superannuation balance must be less than $500,000 as at 30 June of the previous financial year.
• The new rules apply from 1 July 2018 which means only unused cap amounts from 2018-19 and later financial years can be carried forward (the first financial year in which unused concessional contributions can be used is 2019-20).