Given continued interest rate changes, clients often ask us where they should be considering investing to achieve their goals sooner.
Investing your hard-earned money, whether it is money you’ve saved, money you’ve inherited, or money your employer has paid into your superannuation, is tricky business. In the case of money you’ve saved, you’ve probably made a lot of sacrifices to have the funds available. If it’s money you’ve inherited, there’s often a sentimental connection to the funds you have received from a loved one. And, if it’s your superannuation savings put away by your employer or yourself, then these funds are closely linked to a big future goal.
At the heart of investing these funds is identifying what you want to achieve. Is it a short-term goal i.e. holiday or car? Or is it a much longer-term goal i.e. buying a house, saving for your children’s education, or retiring in the future? Once you’ve determined your goal and your timeframe, you are on your way to deciding on the ideal investment approach, and how much risk you should be taking with the investment you’re making.
Broadly speaking, to achieve higher investment returns you need to be prepared to accept higher risk of capital loss or volatility. Typically, higher returns will be achieved by investing in more growth-oriented asset classes including shares, property, or alternative investments such as derivatives and futures. It is important to note that investments of this nature come with significantly more volatility and higher potential for losses. In contrast, investing in more defensive investments including cash and fixed interest will provide a lot more stability and reliable returns, but much lower potential for returns.
The risk you take with your investments should be based on your risk tolerance and balancing your required risks with your capacity to weather risk. All of this should be considered in light of your stage of life, your investment timeframe, your income and future security of income. We’ve previously written a number of articles on the concept of risk profiling and these can be found on our Blog www.wealthpartners.net.au/blog (Use the search tool to search ‘risk profile’ to find the articles)
The true importance of ‘Comparing the Pair’
But what if you’ve determined the risk profile that you’re comfortable which also enables you to achieve your goal, and now you’re considering changing to another investment that seems similar but is performing better. Maybe you’ve seen some ‘industry super’ sponsored advertising while watching your favourite reality TV show that talks about the importance of ‘comparing the pair’ and you feel that your investments aren’t performing as well as others that are labelled the same.
The tagline ‘Compare the Pair’ could not be more apt in this scenario. If you are considering an alternative investment it is crucial that you understand what it is you are comparing. The ability to compare is not always straightforward and can be very misleading. Given this, here are a few things that we recommend you look out for:
- What’s in a name? One of our main concerns regards the lack of standardisation in regard to the naming of investment options and therefore the potential for a name to mislead. For example, typically a ‘Balanced’ investment portfolio will be comprised of 60% growth assets and 40% defensive assets. However, nothing is stopping an investment from calling itself a ‘Balanced’ investment but having a completely different asset mix. In fact, we’ve seen examples of funds that call themselves Balanced but have an asset mix which comprises up to 90% Growth assets. An investment of this nature can perform very well when markets are strong, but has the potential for significant losses and volatility when markets turn.
- What’s in my investment? Another challenge is the lack of transparency in many investment portfolios. It can be very challenging to actually find out how your money is invested, and where it is invested. As such, it can be hard to understand where the risks lie.
- What’s in an asset class? Some investment funds have been shown to take a lot of liberty when it comes to whether they class an asset as a growth or a defensive investment. Direct property is typically classed as a growth asset due to the risks associated, however some funds have taken to classing it as a defensive asset due to the fact it provides a regular income. This can lead to a lot of irregularity in asset mixes within portfolios and elevated returns when markets are strong as they have been in recent years.
If you are considering changing investments, we strongly recommend you take the time to understand your current investment portfolio and how you are invested and then compare this to the investment you are contemplating. A higher return over the past 12 months could be due to a number of factors and you need to be sure you are comparing two similar investments. Be inquisitive, ask questions and do your research.
Most importantly, if you have any reservations regarding your risk profile please speak to your adviser immediately. Managing investment portfolios for our clients is what we do and have been doing for a long time. We’ll be able to guide you to the information need and provide you with advice as to whether the investment you are considering is truly right for you.
If you would like a complete copy of our independent research partners, Zenith’s, research report ‘Compare the pear with another pear, not with an apple’ please email us at firstname.lastname@example.org and request a copy.