‘Don’t put all of your eggs in one basket’, a saying that has been passed down for many generations. It can be applied across a number of situations, but none more so than asset allocation. Often when it comes to investing there is an area that we might be more confident in. You might have more experience or knowledge in that area, or have had success in the past. You could fall into the trap of investing all of your money in this area because it makes sense to focus on what you know and where you are getting a good return. But all investments can be volatile at times and in order to provide protection and insurance to your wealth you must diversify your portfolio.
Different assets will perform differently over time and throughout the investment cycle. By having a variety it means that if one area is underperforming you can make it up with another that is performing well. If you had all your money in an area that was affected by a significant decrease you could lose your money and it may take time to recover.
While diversifying may mean you aren’t always chasing big returns, it will hopefully provide you with a steady investment return.
The main areas you can invest your money in
Here are the 5 main areas that you can invest your money in and we share the pros and cons of each of these:
If you have superannuation then you probably have shares. Shares along with property perform the best over the long term. However, you do need to view shares as a long term investment as in the short term they can be highly volatile.
Diversity within your share portfolio is also critical to ensure that you aren’t overly exposed in one area. You need to diversify between blue chip and speculative shares. Industries can often be affected by the same issues, so you need to review whether you have shares in more than one company within an industry. For example mining, if you have 40% of your share portfolio within the one industry and there is a regulatory change, trade agreement issues or government change then the entire industry may be impacted. This can leave you overly exposed and your investment more volatile.
Property has performed steadily over the long term. With property prices doubling every 8-10 years in Australia this is a strong investment. Australian’s love owning houses and property so many people feel more comfortable investing in property. However, isn’t a liquid asset, so you need to be able to keep it for the long term. While over time property prices have increased they do go up and down. You need to ensure that you aren’t in a position where you have to sell in a time when the prices are down. A diversified portfolio can ensure that you can sell other more liquid assets such as shares in the short term to allow you to hold property till the right time for sale.
This is a safer and more conservative investment. Usually in the form of a term deposit you lend money to an institution such as a bank for a set time and they agree on a set return for that money. This is secure and provides a guaranteed return, however you will get a lower return that in other investments. When interest rates are low this will mean that the interest on your investment will be exceptionally low so you need to pick the right time to invest in fixed interest. This is a good short term strategy if you are wanting to hold cash for a period of time before a future investment. For example you might be holding cash to invest in property next year and you are placing the money in a temporary investment till you need it to pay for the property.
Holding cash over the long term is not a good strategy. However, cash is king and you need cash to invest. Therefore there are times when you need to hold cash so that you have it ready to invest as soon as the right opportunity comes along. You don’t want to miss a great deal because you didn’t have liquid funds available.
There are lucrative alternatives to the above traditional investments. These could include investing in businesses, collectables, private lending and angel investments. These are often highly volatile and speculative. While the returns can be exceptional the risks are high, so having a small percentage of your overall investment in these areas is key. #news #wealthsolutions #wealthspecialist