This is for general information only, and should not be taken as a recommendation. We recommend you seek professional advice before making an investment decision.
Part of the process of becoming an investor is understanding the basic principles of investment.
Investors need to consider why they are investing, taking into account some, or perhaps all, of the following issues:
- Whether to invest for income or growth
- The risk involved
- The investment time frame
Investing for Growth
In 1970 a loaf of bread cost $0.21. In 2000 the same loaf of bread cost $2.36. This increase in price is called inflation. Inflation erodes the purchasing power of money over time, and is measured in Australia by the Consumer Price Index (CPI).
Investments in growth assets help protect the capital value of investments relative to inflation. Shares are a good example of an asset that produces both income and growth.
Investing for Income
Many people not only invest to protect the capital value of their investments but also to provide an income stream. Many retirees and other investors will have a lump sum from which they will require a regular income stream. In the past many investors have used cash and fixed interest to achieve this result. However these types of asset classes do not protect the capital value of the investment against inflation.
Any investment decision you make will involve some kind of risk. The important point is that you understand the relationship between risk and reward so that you can decide the level of risk you are comfortable with.
Understanding that all investments have risk is not the same as accepting risk. That's why it's important that you understand risk and how to manage it effectively so that your investments can achieve what you want.
The key to managing risk is diversification. 'Diversification' means spreading your money across a range of investments and it's one of the best ways to reduce volatility and take some of the risk out of investing.
Diversifying across various asset types allow the high returns from some asset classes to offset low returns from other asset classes that may not be performing as well. Diversification can also reduce the overall risk of a portfolio and maintain the consistency of the returns.
The term ‘asset allocation’ refers to the spread of your investment assets across these investment classes, namely:
- short term cash deposits
- medium to long term fixed interest investments
- property investments
- share investments
Your asset allocation decision will also largely determine the level of risk associated with your investments and determining the appropriate asset allocation is vital in ensuring your investments meet your risk and return requirements.
Dollar Cost Averaging
"Buy low, sell high" may seem like good advice, but even experienced investors find it impossible to pick when the market will go up or down. Dollar Cost Averaging is an investment technique where a fixed amount of money is invested at regular intervals, usually monthly.
By investing a set amount on a regular basis regardless of the share price and market conditions, you buy more shares when the price is down and fewer shares when the price is high. Therefore the average price you pay per share can be lower than the average market price as detailed.
Borrowing to Invest
Gearing is the term used for borrowing funds for investment. Not only can gearing increase your wealth over the long term but the interest paid may be tax deductible.
Gearing carries with it a high level of investment risk, as the more you invest the more you can gain or lose.
We believe that gearing suits those with the following investment credentials:
- Those with a secure income
- An investor with a long term investment time frame
- An investor that understands that gearing carries additional risk
Queensland Country Bank Wealth Creation Advisors
ClearView Financial Advice provides advice on wealth creation and investment strategies. To make an appointment, please contact your nearest branch or call 1800 075 078.