Investment Portfolios

Posted on 26. Aug, 2011 by admin in Investment

Your investment portfolio refers to the types of investments your total financial assets are invested in. For many people, their largest lifestyle asset is their family home, and their largest investment asset is their superannuation or investment property. They may also have other savings in shares, term deposits and bank accounts.

Asset Classes

The four main asset classes are:

• Cash (e.g. bank accounts)
• Fixed interest (e.g. government bonds, corporate bonds)
• Property (e.g. residential, commercial, industrial)
• Shares (e.g. Australian & International shares)

Asset classes can broadly be separated into ‘defensive’ and ‘growth’ investments:

Defensive investments (cash and fixed interest) provide regular income and do not usually grow in capital value. Investment returns and values fluctuate only slightly over short periods. Over the medium to long-term, returns are generally lower than those of growth investments.

Growth investments (property and shares) can provide growth in the value of your capital in addition to income. Investment returns can fluctuate significantly over short periods although over the medium to longterm, returns are potentially higher than those of defensive investments.

Risk and Return

Both defensive and growth investments have a different expected rate of return, and normally, the higher the expected return, the higher the associated risk.

All investments carry some risk. There are broadly three types of risk to consider:

• The likelihood of not getting the expected return on the investment you are considering – including the possibility of losing some or all of your investment
• The risk of volatility – where the value of some investments and their potential return may rise or fall from time to time due to market fluctuations
• The risk of being too cautious – if your money earns less than inflation then it loses its real purchasing power

These risks can generally be managed by assessing the investment you are considering and your own long-term financial situation and objectives.

Normally, the more aggressively you invest, the more likely it is that you will achieve higher long term returns, but you also run the risk of short-term setbacks, as occurred in 2008-2009.

Diversification

By not investing all your funds into the one investment, or even the one asset class, you can significantly reduce the level of fluctuations in your investment value; ie. “not putting all of your eggs in the one basket”. This type of investment approach is known as diversification.

Diversification is not simply throwing your money around haphazardly into as many different investments as you can. It is about selecting investments that complement each other and perform well at different times of the economic cycle.

Knowing how much to invest in each asset class will depend on your personal circumstances, objectives, investment time frame and risk profile.

A Financial Adviser can provide personal advice and help select an appropriate investment portfolio for you.

Tags: assets, investments, portfolio, shares