Below you will find some common investment terms, strategies and explanations:
Knowing where to invest
When it comes to our Superannuation most Australians are automatically put into a default industry fund and have no input into how and where their money is invested.
Whether you are investing within your superannuation or you are investing outside of superannuation it is important that you seek advice to ensure the investments are suitable to your needs. Many aspects need to be considered such as your timeframes, taxation, ownership structures and your tolerance to risk.
An Aspect Wealth adviser will give you the confidence to understand your investment options and help you construct a strategy that suits what it is you want to achieve. We’ll regularly review this strategy to ensure it continues to meet your changing needs. There are a number of key investment principles that have stood the test of time and are essential for all investors to understand.
The benefit of compounding returns
The wonder of compounding (sometimes called “compound interest”) transforms your invested money into a state-of-the-art, highly powerful income-generating tool. Compounding is the process of generating more income on an investments reinvested earnings. To work, it requires two things: the re-investment of earnings and time.
To demonstrate, let’s look at an example:
If you invest $10,000 today at 6%, you will have $10,600 in one year. Now let’s say that rather than withdraw the $600 gained from interest, you keep it in there for another year. If you continue to earn the same rate of 6%, your investment will grow to $11,236 ($10,600 x 1.06) by the end of the second year.
Because you reinvested that $600, it works together with the original investment, earning you $636, which is $36 more than the previous year.
Risk and return are always linked
Another risk for many people is actually being unwilling to accept the risks and invest in the type of assets required to achieve their investment goals.
Diversify to reduce your risk
Values can be volatile
Dollar Cost Averaging
For example, you decide to purchase $100 worth of ANZ shares each month for three months. In January, ANZ is worth $33, so you buy three shares. In February, ANZ is worth $25, so you buy four additional shares. Finally, in March, ANZ is worth $20, so you buy five shares. In total, you purchased 12 shares for an average price of approximately $25 each.
Time in the market
Gearing can increase gains and losses
‘Australian shares’ refers to the shares of companies listed on the Australian Securities Exchange and ‘international’ or ‘global’ shares refer to companies listed on overseas exchanges such as the New York or London Stock Exchanges. Some global companies, such as BHP Billiton, are listed on both Australian and international exchanges. Shares are generally considered growth assets which can fluctuate in value based on their own performance and broader market sentiment, but they are as diverse as the businesses, industries or regions in which they operate.
Fixed income / Interest
Like shares, many fixed income investments can be traded on markets and their value can fluctuate depending on the perceived risk of the issuing organization, as well as prevailing interest rates and outlook.