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24 Jun 2021

Understanding how to match your investments to your wealth goals

By Damon Frith, wealth editor for Citi A selection of investments that have different drivers of performance means you can be better placed to ride out disruptive events

Whether you're a sophisticated investor or a novice dipping your toe in the water for the first time, it's crucial to understand how different asset classes can help you achieve your investment and lifestyle goals.

The four main asset classes are shares, fixed interest, cash and property. But there are many others, like currencies, managed funds, private equity, hedge funds and even collectibles.

Asset classes also fall into two main categories – growth and defensive. They will perform differently depending on the underlying economic conditions at any given time. And some will be better suited to your needs than others.

For example, you may be seeking a regular source of income, or you might be looking to generate long-term capital growth. You might have a low tolerance for risk, or you might want ready access to your money.

When you understand the pros and cons of each asset class, you will be able to make more informed investment decisions that suit your wealth management and lifestyle goals.

1. Growth assets

Growth assets focus on generating capital growth and income. They are suited to investors looking to grow their investment over the long term – usually seven to 10 years. They include shares, property and alternative investments.

Growth assets tend to have higher levels of risk, but they also potentially deliver higher returns than defensive assets over longer investment time frames. They can also be more difficult to navigate and manage during periods of high market uncertainty, caused by events like a global financial crisis or pandemic.

Shares: Also known as equities or stocks, are securities that give investors part ownership in a publicly listed company.

If the company performs well, you can benefit from share price growth (capital growth) and receive income paid as dividends. But if the company performs poorly, your shares could fall in value and there may be no dividend payments.

Because share prices fluctuate daily and react to short-term market volatility, it's worth holding shares for at least five to seven years to get the benefits of long term growth trends.

You can choose to invest in Australian shares, international shares or a mix of both. With international shares you also get the option to add currency to your investment portfolio and potentially increase your returns.

Property: Property can include residential or commercial property, global property, listed real estate investment trusts (REITs) and other property securities.

Property is considered a growth asset because the value of residential, commercial and industrial property can increase substantially over the medium-to-long term, generating higher returns than cash or fixed interest.

But just like shares, property can also fall in value with the risk of losses. REIT unit prices, for example, can fluctuate based on underlying property fundamentals or share market volatility.

Property falls into the long term investment category, may involve significant upfront capital commitments, and is generally not easy to liquidate quickly if you need access to cash. 

2. Defensive assets

If you’re looking for more stability, defensive assets are considered lower risk and will generally generate income more consistently. It includes investments like cash and fixed interest (bonds and securities like convertible notes).

Because defensive assets tend to have lower risk levels, they may generate lower returns over the long term compared to growth assets, but are considered an important part of a balanced portfolio.

Cash: Cash investments include short-term bank deposits, 90-day bank bills and high yield savings accounts like term deposits.

Cash is a defensive asset because it provides stable, low-risk income in the form of regular interest payments. The beauty of cash is that it is highly liquid and has less capital risk than growth assets, which is important when it comes to protecting wealth.

Its downside is in ultra low interest rate environments, where inflation and other considerations like tax can erode the return, or even lead to a negative real return.

Fixed Income: Fixed interest investments include government and corporate bonds and typically involve an investment over a one to three-year timeframe, although there are longer term options if desired.

When governments or companies issue a bond they are effectively borrowing money from investors. In return they pay investors a regular rate of interest (an income stream) over the life of the bond with the borrowed amount repaid when the bond matures.

You can buy Australian-issued or offshore corporate bonds in an extremely diverse range of companies, and you can use different currencies to act as a hedge against movements in the Australian dollar, or even enhance your returns. It's a strategy that can add further diversification to your investment portfolio, and it can be used for other asset classes like international shares and property.  

Bonds are considered a defensive investment because they generally offer lower potential returns and potentially lower levels of risk than shares or property. But the income stream from bonds can be higher than earnings from a cash investment.

It's important to understand that bond prices move in an inverse relationship to interest rates. So when interest rates are declining, bond prices will rise, which often makes them more appealing to investors.

Typically, they are also uncorrelated to shares, meaning the reasons for their performance differ from the drivers affecting the sharemarket. By holding uncorrelated assets you can reduce the risk in your portfolio and smooth out your long term returns. 

No matter your wealth generation expectations, the key is not to put all your eggs in one basket. Different types of investments and different asset classes will help ensure that even if one of more of your investments are underperforming, as a portfolio your investments can stay on target to meet your goals.


Wealth Solutions

Any advice is general advice only. It was prepared without taking into account your objectives, financial situation, or needs. You should also obtain and consider the relevant Product Disclosure Statement and terms and conditions before you make a decision about any financial product. Investors are advised to obtain independent legal, financial, and taxation advice prior to investing. Past performance is not an indicator of future performance.

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