5 Different Types of Investments to Consider for Wealth Creation

To invest successfully, it is important to seek out investment assets that fit your financial goals, time frame and risk tolerance. Below are five main types of investments explained, to help you build the right portfolio to meet your objectives.

• Cash Investments
• Bonds
• Real Estate
• Investing in Shares
• Exchange-Traded Funds (ETFs).

Cash Investments

Cash investments are exactly how they sound: an investment in cash. This makes it “liquid”, which means it is easy to access when you need it. Cash investment options vary; as well as just cash itself, you can invest in term deposits and actively managed cash funds, as well as simple savings accounts. While cash is considered very low risk, it holds lower return potential compared to other high-risk investments like shares. Even so, cash is a great investment asset option to have in a balanced portfolio, especially if you are nearing retirement and looking to secure your finances and retirement savings.

Bonds

Investing in bonds is essentially lending money to a company or government body. For this, you receive regular interest payments (coupon payments). When first given out, bonds start with a “face value”. If you decide to keep the bond until it reaches its maturity, then you get back the principal (face value) of that bond. However, if you decide to sell earlier, you will get the market value of the bond. This may or may not be lower than the face value.

The Australian Government and other corporations mainly issue bonds in Australia. Interest on government bonds is paid every six months at a fixed interest rate, so they are considered fixed interest investments. Corporate bonds are usually not available on the retail market for less than $500,000, and if you come across one that is, you may be up for a scam. It is essential to get the proper financial advice and full product disclosure upon investing in a bond. While you need to invest wisely in bonds, they are seen as a low-risk investment, low growth investment. They are, however, still vulnerable to the interest rate changing the market value of the bond, and the risk of the bond issuer defaulting on entering insolvency.

Real Estate

Property investment, although subject to more volatility than cash, exhibits lower volatility compared to other assets like shares; however, it still carries a certain level of risk.
José Hernandez, Financial Planner, Elliot Watson Financial Planning.

When exploring types of assets to invest in, many investors prefer investing in property because it is physical and seems uncomplicated compared to alternative investments to someone with no initial investment knowledge. If you decide to rent your property, you will earn regular income payments, making it an attractive opportunity to increase your fixed income. When you decide to sell, you may benefit from any capital gains as a result of any increases in the value of your property. You can also earn tax deductions, offsetting any expenses on rental income.

There are, however, some pitfalls and costs to be aware of before you jump into property investing. You first need to ensure that you are aware of the upfront costs of purchasing a residential or commercial property, such as stamp duty and legal fees. The rental income you receive may not cover your loan repayments or other costs involved. There may even be times when you don’t receive rent at all due to a vacancy in your property. The risk of interest rates rising may also mean less profit for you. Potential drops in the property market may mean that you could end up with a loan bigger than your property is worth. Ultimately, property investment is a slightly higher risk, yet potentially highly rewarding type of investment that works well within a balanced portfolio.

Investing in Shares

Shares can be great growth investments for building wealth over a long period. Make sure you take advantage of the advice of a qualified investment adviser, who can tailor and balance your portfolio to your needs and objectives. You will want to look to keep a diversified portfolio that is spread across a variety of industry sectors and emerging markets in order to manage your risk. Your financial adviser will encourage you to check in periodically to stay up to date with any market changes or indicators of future performance.

Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) are a cost-effective way to earn a return just like an index or a commodity. You can buy and sell units in ETFs through your financial adviser, who will manage it in the same way shares are bought and sold. When you invest in an ETF, you don’t own the fundamental investments. Instead, you own units in the exchange-traded fund. ETFs are a great way to diversify your investment portfolio within an asset class and across markets or assets that would otherwise be hard to access. An ETF’s net asset value is shown daily, allowing you to track how it is performing. They are an affordable and accessible way to invest, as well as easy to trade quickly.

ETFs and Mutual Funds are both examples of pooled investment funds. While Mutual Funds are an actively managed fund, while ETFs are passively managed. Mutual Funds are managed by active fund managers who base their investment decisions on market outlooks. ETFs are generally more transparent and less risky than Mutual Funds, as they mirror a particular index. ETFs also allow you to start investing with smaller amounts.

When dealing with ETFs, you are dealing with the market and different sectors, which can rise and fall in value. There is also the risk that some of your ETFs will be invested in assets that are not liquid, such as emerging market debt. There can be tracking anomalies also when looking at an ETF’s return. It may look different than the index or asset it is meant to track, usually because of differences in the assets owned by the ETF and the index it is supposed to track, as well as fees and taxes. You could be buying or selling when the ETF is not currently trading at the indicative net asset value (iNAV).

Different asset classes carry pros and cons, and different levels of risk and return. Because of their complexity, we recommend choosing independent financial advisers you trust to act as fund manager for your ETFs and assist you in making investment decisions.

With so many different types of investments to explore, it can be challenging to choose which assets are best suited for your portfolio. Taking the time to speak with your financial adviser will help you draw up a clear picture of your future financial objectives. Your adviser will be able to take your own situation and dreams for the future and tailor a balanced investment strategy that suits your individual needs. For more information, contact Elliot Watson Financial Planning at 02 4038 1623 and explore your different investment options today.

The information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information, you should consider its appropriateness regarding your objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser.
The views expressed in this publication are solely those of the author; they are not reflective or indicative of the licensee’s position and are not to be attributed to the licensee. They cannot be reproduced in any form without the author’s express written consent.
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