WARNING: As we have not considered your financial situation, needs or all of your objectives please consider the below statement as general advice and that the material is provided as background information only. Any personal references are generic and before acting on any general advice, you must consider the appropriateness of the advice in light of your personal circumstances.
It is assumed that your investment time horizon is long term (generally meaning at least 10 years), this is extremely important when it comes to choosing the type of investments that best suit you. All things being equal, you can afford to be more aggressive with a longer investment time frame. Generally a longer investment time frame means lower risk in terms of capital loss due to investing across business, political and economic cycles. Your capital should grow over time making up for short-term periods of negative returns
Numerous surveys, such as the Australian Stock Exchange - Russell Long Term Investing Report, show that, over the long term, in Australia shares and property have provided the highest returns. We classify these as growth assets.
As you are putting money aside every pay, rather than investing a lump sum, investing in a discreet property or a share portfolio is not really a practical option. Unless you are prepared to wait while saving enough for either a deposit on a property or have sufficient funds to acquire a meaningful parcel of shares.
An alternative to this direct approach and better suited to “savings plans” is a regular contribution facility offered by many well-established fund managers.
This regular contribution facility will provide the potential benefit of "dollar cost averaging", meaning that your investments are made periodically (rather than just once), thereby reducing the risk of investing all your savings at an inappropriate time. A particularly aggressive investor may even consider combining this with some borrowing (known as instalment gearing) but you should seek professional advice regarding this aspect of an investment.
In a managed fund, your money is pooled together with other investors and the investment manager or Fund Manager then buys and sells shares or other assets (property) on your behalf. Generally you own units in the managed fund and they are bought and sold through the fund manager.
A managed fund will usually pay income or 'distributions' periodically and the value of your investment will rise or fall with the value of the underlying assets.
An aggressive investor may consider a growth or high growth managed fund option because:
1. It is expected to provide long-term returns better than a bank account
2. Your capital should grow over time making up for short-term periods of negative returns
If an investor has a shorter investment time frame a more suitable option may be a balanced investment fund, which incorporates other non growth assets such as income only investments.
Another important factor to consider is the taxation structure that you use to hold the investment.
Depending on your personal circumstances and preferences regarding management and administration, the investment could be held in your name as trustee for your child(ren) or made using an investment or insurance bond where the tax is paid within the investment. Once again seek professional advice regarding this investment product.
By John Mlikota AFP®