Invest in Different Kinds of Assets
People who know me personally know that I love shoes – but then who doesn’t? So it’s no surprise that I don’t just have one pair that I wear every day until it wears out; I have shoes for every occasion, and then some. I just love them! Let me share with you what I have:
- Boots: Casual, comfortable, and warm in winter
- Sandals: Also casual and comfortable, and suited for summer
- Stilettos/heels: Stylish and dressy, not always comfortable, but designed to finish off a “Wow!” outfit
- Flats: Stylish but functional, versatile everyday shoes
In the same way as we have different kinds of shoes, we can also invest in different kinds of assets – known as “asset classes”. Broadly, there are four asset classes available: cash, fixed interest, property, and shares. Cash and fixed interest are called defensive investments, while property and shares are growth investments. Let’s review each of these four asset classes and their pros and cons.
Cash includes various products such as bank accounts, cash management trusts, and the cash you have in your wallet or purse. Generally, cash is the most “liquid” investment type because it is money already. You can increase or decrease it instantly through deposits and withdrawals. Cash might be a suitable investment for people who require this liquidity. It also gives some peace of mind that it won’t rapidly decrease in value from something like a share market crash or bursting a property bubble. However, it will lose its purchasing power over time due to inflation.
Fixed interest investments are a diverse investment category, and include term deposits, government bonds, corporate bonds and debentures. These are often called income securities.
With most fixed interest investments, the interest rate and timeframe for investment are set from the outset (hence the name “fixed”).
Property is a popular investment in Australia, and you can invest in different kinds of property, including:
- Residential (Home and Units)
- Retail (Shopping Centres)
- Commercial (office buildings)
- Rural (farming)
- Tourism and Leisure (hotels, motels, resorts, theme parks, casino’s and so on)
- Industrial Property
- Infrastructure (toll-ways, airports, and so on)
Property can provide you with an income return (for example, rent) as well as capital growth. This return depends on a number of factors, including location, type of property, rent, and quality of tenants. Property is a long-term investment for a number of reasons:
- You incur costs each time you buy and sell property
- It takes time to buy and sell property
- Property prices can change rapidly in the short term, but tend to steadily increase in the long term.=
Shares represent part ownership in a company. When you invest in shares of a company, you’re buying a share of the company’s income and growth. Some people (traders) invest for the short term, but most invest for the long term. Because shares are traded daily, they are more volatile than property. Australian shares are a relatively liquid investment: Under normal circumstances, you can sell your shares and receive the proceeds within a number of days. However, there are exceptions – for example:
- If the share price is falling and there are a limited number of buyers
- If a company in crisis puts a trading freeze in place
- Shares provide two forms of return:
- Dividends: The company pays shareholders a share of the profits.
- Capital growth: The price of the share increases or decreases, leading to a capital gain or capital loss.
Some investors reinvest their dividend entitlement into more shares. This is often referred to as a dividend reinvestment plan. It is not offered by all Australian companies.
Posted by Tracey Sofra at July 27, 2017