Key Investment Concepts

Understanding the key concepts that can help guide you in making the financial decisions that matter to you to achieve your goals.

There are a multitude of concepts that are important to understand when investing and creating wealth. Understanding the concepts that drive investment markets and impact the decision-making process when making investment decisions is critical to ensuring you keep on track and achieve your goals.

There are many concepts that impact investment decisions, so we have identified several of the most common and most important concepts to be aware of.

About Investing

What should you consider when investing?

There is a lot to think about before you invest.  Generally, you won’t get the highest return at the level of risk you feel comfortable with. However, you need to consider how tolerant you are of market fluctuations and the probability that your investment returns may not meet your expectations and may even fall in value. When considering your investment strategy, ask yourself:

1) What are your financial goals?

Do you have a clear understanding of what it is you want to achieve? Are your goals financial? Or do they also involve lifestyle goals as well?  Many people focus on just the financial goals but neglect the health and lifestyle goals that are required to be achieved so that you can enjoy your retirement.

2) How soon do you want to reach your goals?

Obviously, the longer, the better, as it gives you the opportunity for the amazing effects of compound interest to work in your favour.  The longer you have to achieve your goals, the easier it will be.  We call this your investment, Horizon. This determines the length of time you have to accumulate your retirement nest egg and how long this money will be invested. It is important because time impacts how much you need to contribute and the return on the investment that you can expect.

3) How much do you have to invest?

For most people in Australia, the main investment vehicle is their Superannuation.  You may say what about my home? Well, as investment professionals, we do not consider the family home to be an investment asset. 

Your employer is obliged to contribute 11% (and potentially up to 12% by 2025) of your ordinary time earnings to your Superannuation account, at least quarterly. This may not be enough to reach your retirement goals, and you may have to make additional contributions yourself through pay deductions, salary sacrifice, or by making additional after-tax payments up to allowable contribution limits.

If you are self-employed, you will need to fund your retirement without employer support. This is where other assets, such as investment properties and investing outside of super and growing other methods of income, become important.

One of the best ways to ascertain the level of contribution required to maintain your lifestyle during retirement is to seek the advice of a licensed financial adviser.

4) What level of income do you need in retirement?

This is the key to determining how much money you will need to accumulate to reach your retirement goals. For retirees, this determines how much money you will need in order to maintain your desired lifestyle during retirement.

5) What is your tolerance to risk?

How great a fall in the value of your investment funds could you cope with, and for how long? Are you willing to accept more risk, giving you the potential to earn greater returns but also the potential to incur greater losses? You should consider how you feel about fluctuations in the value of your investments and incurring capital losses, as well as capital gains.

6) How do we help you achieve these outcomes?

As a financial advisor, we help you develop an investment strategy with an asset allocation that is appropriate for risk tolerance goals and timeframe backed up by years of experience and understanding of the risks involved, as well as an understanding of the common vices that may impact an investor and their behaviour.

Investment Concept 1: The Financial Pyramid

Investment Concept 2: Risk & Return

To make the right financial decisions, you need to understand how you feel when your investment balances go up and down and how this aligns with achieving your goals.

This is because it’s important you are comfortable with investment movements; you will also need to make decisions as to what you are willing to trade off in relation to the level of risk you are comfortable with and when you would like to achieve your goals.

Risk and return tend to be closely related, so by choosing a lower level of risk, you are also choosing to reduce your long-term return expectations.  You may be risk averse and prefer to invest in safer, lower-interest cash in bank deposits where the value of your money is unlikely to fall. 

You may accept the risk that the value of your money may go down over short periods of time, but has the potential to earn a higher return over a longer timeframe if invested in growth assets such as shares and property.

It is important to remove the losses that are always possible, depending on the fluctuations in the share market and when you want to withdraw and use your investments.

A way of reducing risk is to diversify your investments. Before investing, it is important that you understand the concepts of risk, return, and diversification and how these may impact your personal situation.

What Do We Mean by Risk?

Risk, to some, may mean the possibility of losing a portion of your capital. For others, the risk of their assets not producing enough income may dominate their concerns.  Risk cannot be eliminated. However, it can be measured and managed within an investment portfolio. The key is to determine the appropriate level of risk for you. Taking on greater short-term risks may be necessary to receive the long-term returns needed to achieve your lifestyle goals and objectives.

How Do You Cope with Risk?

It is important to understand the risks that you may be exposed to and how they will impact your personal situation. Assessing risk and potential investment returns should be in the context of your goals and the time that you have to achieve your objectives.

Investment Risk

All investments carry some level of risk. In an investment context, risk has traditionally been thought of as the possibility of losing some of the money you have invested. However, risk can also be considered as the chance that your retirement goals will not be met or that investments may not perform according to your expectations.

Investments that provide the potential for higher long-term returns tend to be those that produce greater fluctuations in returns in the short term. These investments are generally described as growth assets. Investments that provide more stable but possibly lower long-term returns are generally considered defensive assets. It is important to understand the type of investor you are and what you consider as acceptable in terms of risk.

Your risk profile will depend on your time frame, your level of acceptance of volatility in investment returns and your performance expectations.  The following significant risks are identified to assist you in better understanding your investment decision.

Market Risk?

This refers to changes in investment valuations that may result in the loss of capital. Factors that drive changes in investment valuations include share market conditions, economic cycles, inflation, investor demand levels, business confidence and central bank policies.

Company-specific Risk:

This refers to a company’s performance due to factors that are unique to that company. These factors may cause a share’s return to differ from that of the market and the risk that a share’s return is substantially below that of the market. Actively managed portfolios look to gain exposure to this risk to outperform the market.

Currency Risk:

This refers to the movements in the value of foreign currency, which may affect the local value of overseas investments.

Manager Risk:

This applies where an investment is via a managed fund and refers to the risk that the manager will neither achieve its performance objectives nor produce returns that compare favourably against similar managed funds.

Liquidity Risk:

This exists when particular investments are difficult to purchase or sell within a timely period and at a fair price.

Interest Rate Risk:

This refers to changes in the market values of fixed-interest securities. An increase in market interest rates usually produces a reduction in the market value of fixed-interest securities. Similarly, a reduction in market interest rates usually increases the market value.

Derivative Risk:

An investment manager may use financial derivatives, such as futures, options, swaps and forward rate agreements. Risks associated with derivatives include the value of the derivative not moving in line with the underlying use of fixed-interest securities. Asset, the counterparties to the derivative (including the option) not being able to meet payment obligations and the derivative position being difficult or costly to reverse.

The relationship between Risk & Return

There is a direct link between risk and return. Investors must be prepared to accept additional risk to achieve higher returns. Shares and property may offer higher returns than other asset classes in the long term, but they will also provide the highest level of performance volatility. Generally, the higher the risk the investor bears, the greater the potential for short-term capital value fluctuations.

When determining the level of risk you are prepared to accept, it is important to factor in your investment time frame, i.e., how long you plan to invest. Another way to manage investment risk is to select investments that best match your goals and time frame. Some investors with short investment time frames are concerned about protecting their capital and have very different needs from investors who want their investments to increase significantly over a long period of time.  The graph below illustrates the “risk/return trade-off” concept:

Source: AMP Financial Planning (illustrative only)

This second Graph shows the grouping of Growth Assets versus Defensive Assets and where this may appear on the Risk return curve.

Historically, each of the three major investment asset classes—stocks, bonds, and cash—has produced consistent long-term returns, along with consistent degrees of risk. Understanding these historical patterns can help you handle risk in your own portfolio.

Research completed by funds Manager Vanguard has shown that getting your asset mix right can have more impact on your long-term returns than anything else—it's even more important than the individual investments you choose.

How to strike a balance

For investors, risk comes in many forms. There is the risk of a downturn in stock prices. There is the risk that inflation will erode an asset's purchasing power. There is the risk of political instability affecting international markets. And so on.

Achieving long-term financial goals means accepting the trade-off between risk and reward and understanding the historical patterns that have gone along with the three primary asset classes. Stocks, historically, have offered higher long-term returns than bonds or cash, but they have also carried more risk. Bonds have offered higher returns, with more risk, than cash. Cash has provided stability, but money stuffed in your mattress nets zero return and will probably fail to keep pace with inflation. Paradoxically, taking a conservative approach to market risk may expose you to a high degree of purchasing power risk.

Fundamentally, how you allocate your assets among stocks, bonds, and cash depends on how much risk you are willing to take for an expected return. And that depends on why you are investing and when you need your money.  So, what is the right way to divvy up your portfolio? You will need to answer two basic questions:

1. What are your goals and time frame?

To manage risk effectively, first establish your goals. (Are you saving for retirement or a vacation? Or both?) Next, set a reasonable time period to reach them. Generally, the longer your time frame, the more money you can consider allocating to stocks and stock funds, which have the greatest long-term potential for growth.For near-term goals—those less than a year away—consider conservative cash investments, such as a money market fund. On the other hand, if you're saving for something a little farther out, such as a down payment on a house with a time frame of three years, give some thought to lower-risk assets like short-term bonds. If you're looking even further down the road to retirement, you may be able to afford to invest more aggressively in stocks—as long as you're willing to accept the added risk.

2. How well do you sleep at night?

* Illustrative purposes only. It is important to note that past performance does not indicate future performance.

Over the last 80 years, as you can see in the illustration above, stocks have turned in the strongest overall long-term performance of all three asset classes—with some painful short-term setbacks along the way. To be a successful investor, you need to expect the unexpected and be prepared for bad days as well as good ones.

As the chart below shows, annual returns for stocks have fluctuated much more dramatically than for bonds and cash, ranging as high as +54% and as low as -43 %. It's easy to handle the upside of stocks, but some investors would have trouble sleeping after a steep drop. While bonds haven't offered the same high reward potential as stocks overall, they generally haven't fallen as far either. That's why having a mix of stocks and bonds in your portfolio can sometimes lessen the severity of turbulence.

fidelity.com.au Source: Morningstar Direct. All returns shown are in AUD terms (assuming currency exposure is unhedged) and assume dividends are reinvested. Returns are average annual returns over the periods shown. Indices used are: Australian shares: S&P/ASX 200 All Ordinaries TR, Global shares: MSCI All Country World Index NR, Indian shares: MSCI India Index NR, Chinese shares: MSCI China Index NR, US shares: MSCI North America Index NR, Asia ex-Japan shares: MSCI Asia ex-Japan Index NR, Balanced portfolio: 70% growth assets (40% S&P/ASX 200 All Ordinaries TR, 22% MSCI All Country World Index NR, 8% S&P/ASX 300 Property Index Trust), 30% income assets (20% UBS AU Composite All Maturities Index, 5% Barclays Capital Global Aggregate Index, 5% UBS Bank Bill All Maturities Index). NR: NR at the end of the benchmark name indicates the return is calculated, including reinvesting net dividends. The dividend is reinvested after the deduction of withholding tax, applying the withholding tax rate to non-resident individuals who do not benefit from double taxation treaties. Index performance does not take into account of management costs, operational and transactional costs or tax. Index performance does not reflect the performance of any individual portfolio of stocks. Please remember past performance is not a guide to the future. Investments in overseas markets can be affected by currency exchange, and this may affect the value of your investment. Investments in small emerging markets can be more volatile than investments in developed markets. This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (‘Fidelity Australia’). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You also should consider the Product Disclosure Statements (‘PDS’) for respective Fidelity products before making a decision whether to acquire or hold the product. The relevant PDS can be obtained by contacting Fidelity Australia at 1800 119 270 or by downloading it from our website at www.fidelity.com.au. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details about Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website at www.fidelity.com.au. © 2019 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

* Illustrative purposes only. It is important to note that past performance is no indication of future performance.

So, how do we Understand your appetite for investment risk?

We will provide you with a Risk Tolerance questionnaire that assist us in determining your risk profile.

Your risk profile tells us how much risk you are willing to adopt to achieve your return outcomes.  Investing involves risk of one type or another. Some, like inflation risk, are well understood and can be quantified.  Others, like the ‘event risk’ of an earthquake or major war, are less predictable.

Our experienced research team uses sophisticated modelling to identify and quantify the different types of risk both at a market (economic) level and within the different asset classes.  While it is impossible to eliminate all potential risks, a well-designed portfolio can smooth the variability of returns while increasing the chance that your investment strategy will meet your goals.

Once you have determined the risk profile, this allows us to design a strategy that is aligned to your needs and investment objectives, is aligned with your risk tolerance, and delivers the highest potential return for your level of comfort. We will then make sure that you understand how this is appropriate to your needs and circumstances. In this way, we produce an investment portfolio that is truly suitable for your goals and achieving the lifestyle you deserve.

Investment Concept 2: Types of Investments

Types of Investments: Asset Classes

Asset classes are the building blocks of any investment. The five main asset classes are cash, fixed interest, property, shares ad Alternative Assets.

Cash and fixed-interest asset classes are ‘defensive’ assets, which means they are designed to defend your investment from losses. These tend to be more popular for short-term or risk-averse investors – those who prefer safer, more secure investments with consistent returns. 

Property and shares are ‘growth’ assets designed to grow your investment. These are higher-risk and more volatile assets. They are designed for long-term or aggressive style investors willing to ‘ride out the peaks and troughs of their investment due to their potential for higher investment returns.   The most appropriate asset classes for your investment will depend on several factors, including your risk tolerance, how long you plan on investing, and your financial objectives. 

Defensive Assets

Growth Assets

Is your current asset allocation right?

Are you investing in the most appropriate asset classes to make the most of your current environment? Are you accepting the appropriate amount of risk to meet your financial goals? Are you comfortable with the investments that you hold even when markets go down? These are the questions that we, as financial advisors, will help you answer.

Asset Class- Historical Returns

Asset class returns over 30 years.

Source: AMP Capital Investors, Bloomberg, Fact set

The above graph illustrates how high-returning assets deliver the highest average returns, but they also have a much wider range between its peak and trough than bonds or cash - which reflects their relative volatility - and the traditional relationship between risk and return.

It also shows how all defensive assets, such as Australian bonds, are averaging rates of return just below international shares and comparable to Australian listed property trusts. The global financial crisis of the late 2000s may have changed the old risk and return relationship for international investments and highlights how strongly the Australian economy has grown relative to the world.

Investment Concept 3: Diversification

Diversification is an important way of managing the risks associated with investing. It involves spreading your money across different asset classes to provide more consistent overall returns. Sometimes, underperformance in one asset class can be offset by positive performance in another asset class. Depending on how you diversify, you can also potentially smooth out performance fluctuations by investing in multiple asset classes and funds managed by several fund managers.

Risk is limited by the fact that not all asset classes or industries or individual companies move up and down in value at the same time or at the same rate. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not ensure against market risk.

Managing Risk through Diversification

One of the most effective means of reducing the different types of risk is to diversify your portfolio. No one type of security, asset class or investment manager provides the best performance over all time periods. So, a range of investments should reduce the risk of each of the investments within a portfolio experiencing drops in performance at the same time. This is simply because one asset class or manager may perform well to counter the poor performance of another. Diversification can be implemented in three distinct ways:

Across Asset classes

history shows that spreading your money across various asset classes can be the best way to guard against short-term volatility in any one asset class and provide greater longer-term returns. Whether it is short-term cash deposits, property investments or shares, you can diversify your investment based on your comfort level.

Market conditions change regularly, including interest rates, demanding property and share markets or even legislation and policy changes.

Each asset class may be the best performer at a different time of the market cycle. Diversifying across asset classes helps to reduce the risk of having a necessary exposure to one investment or one asset class placing adverse conditions; it also means you’re able to benefit when one investment is performing well.

Across Markets & Regions

Spreading your exposure within each asset class across a wide range of countries, currencies, industries, and stocks ensures that your investment is not narrowly concentrated in a region or industry. This reduces the impact of a region or industry downturn.  it is now relatively easy to invest in international markets from Australia. The performance markets around the world can differ greatly at any point in time. Considering international investment opportunities allows you to manage against the risk of the local market not performing.   Did you know that the Australian stock market makes up just less than 3% of the world’s stock markets? It is also important to be aware that currency factors can also play a significant role in increasing or decreasing returns.  Investing with respect to currency is often called hedging.

Across Fund Managers

Different investment management styles tend to excel under different economic and market conditions. By combining a range of investment managers with complementary investment styles, you may be able to neutralise the bias to any one style in each asset class.

In simple terms, diversification means ‘don’t put all your eggs in one basket. It means spreading your investments across different assets to balance your returns; if one asset class is performing poorly, another investment may be achieving better returns.

The benefits of diversification are illustrated in the graph below. If you invested in shares, as an example, the dotted line shows what your returns may have been over time. If you invested in fixed interest, your returns would have looked like the broken line. By investing 50% of your portfolio in shares and 50% in fixed interest, your return would have been straight down the middle of the returns of each of these asset classes and is illustrated with a straight line.   These returns offset each other, and the combined return is, therefore, likely to be less volatile.

Which Asset classes are appropriate for your investment?

All investments carry some form of risk, and you need to be comfortable with the amount of risk you are willing to take. Your risk profile considers your attitude towards volatility, need for income, and time horizon for your investment. A qualified financial planner can help determine your risk profile by asking some simple questions:

• How much money do you need to reach your goal?
• What is the timeframe you have to meet your goal?
• Would you accept your investment falling behind inflation?

What does it all mean?

Your attitude to investment risk is a crucial factor in determining an appropriate investment strategy to meet your needs. Investing is considered risky because there is uncertainty about how the investment will perform over the short and long term. Different types of investments experience different levels of volatility.

Negative returns can happen at any time, so during periods of poor performance, remaining invested for the minimum investment term will provide an opportunity for your portfolio to recover.  Here are the main approaches to investing, otherwise known as investment risk profiles.

How will our advice help you diversify effectively?

Diversification spreads your investment portfolio across different asset classes to reduce volatility and deliver ‘smoother’ returns over time. Effective diversification means selecting a mix of investments that addresses your specific investment needs.

We will design your portfolio to meet your needs, ensuring that it is fully diversified across and within all asset classes.

Spreading your investment will also consider the fact that different asset classes can move independently. For example, the

share market index can rise while the bond market is stable, or vice versa.

The key is to have a portfolio with a combination of assets and strategy that will meet your investment needs with the least amount of risk.  This is our expertise and understanding of how to ensure you take advantage of the above.

So, what is your Asset Allocation?

Asset allocation is the name given to the mix of asset classes you choose to build your portfolio. The common asset classes are cash, fixed interest, property, shares and alternatives.  Your asset allocation is one of the most important factors in determining the returns and risks in your portfolio.  Selecting a suitable mix will play a crucial role in ensuring your portfolio achieves your objectives within your comfort zone.  Your asset allocation is the 1st step towards developing your personalized investment portfolio. The five Asset Allocation options we use are listed at the back of this booklet.

The Asset Allocation Process

Step 1: Define your Goals and Time Horizon

The first step in the asset allocation process is to define your goals and the corresponding time horizon.

For those goals. Typical investment goals include:

• Funding retirement
• Funding educational needs of children and grandchildren
• Funding goals like a vacation home or wedding
• Creating an inheritance or other legacy fund, generally accepted time horizons are:
• 1 to 3 years - Immediate
• 3 to 5 years - Short Term
• 5 to 10 years - Intermediate-Term
• Over ten years - Long Term

Step 2: Assess your risk tolerance.

Assessing your risk tolerance generally involves completing a risk tolerance questionnaire. There are many factors that are examined when assessing an investor's risk tolerance. These may include:

• Time Horizon
• Financial Resources
• The pursuit of Multiple goals
• Investment experience
• Liabilities or Obligations of the Investor
• Personality

Step 3: Identify Target Asset Allocation Model for Implementation

Often, the net result of a risk tolerance questionnaire is a recommended allocation for you to implement.  This recommended allocation may be represented as a model portfolio. Here are some examples of suggested model portfolios that are based on an investor's risk tolerance:

• Preservation (100% Defensive & Income Only)
• Defensive  (70% Income and 30% Growth)
• Balanced (50% Growth 50% Income)
• Balanced Growth (70% Growth, 30% income)
• Growth (85% Growth / 15% income)
• High Growth (100% Growth)

Step 4: Review and Rebalance Regularly

No one should expect their investments to run on autopilot and monitor themselves. That is why the most important step in the asset allocation process may be ensuring you continue monitoring your allocation.  Different assets perform differently over time. This may result in the need to rebalance your portfolio regularly. Additionally, changes in your life, like marriage, divorce, a new child, serious illness or injury, may change your tolerance for risk and, therefore, a change to your asset allocation.

Your Risk profile is just a starting point. Once you have determined the risk profile, we will select investments to match a portfolio that is aligned to your needs and objectives and then explain how this is appropriate to your needs and circumstances.  This will also be recorded in an advice document, generally known as a Statement of Advice. 

Investment Concept 4:  Investment Types

Managed & Direct Investments

What are Managed Investments?

A managed Investment (Fund) fund pools an individual’s money with that of other investors to invest and is managed by specialist investment managers on the client’s behalf. 

Managed funds come in many shapes and sizes. Some funds invest in just one type of investment, such as Australian shares, while others, known as diversified funds, invest across a range of asset classes, including Australian shares, international shares, fixed income, property securities and cash.

So whether the amount being invested is $2,000 or $200,000, the money has access to the investment buying power of millions of dollars. This buying power means you can benefit from opportunities normally only available to large corporations or those with extensive specialist knowledge.

How are Managed Funds Structured?

Most managed funds are structured as unit trusts. When you invest, your money buys ‘units’ in a fund. The number of units you receive depends on the amount you invest and the current unit price. Put simply, if a unit in a fund was worth $1 and you invested $2,000, you would receive 2,000 units (less the value of an entry fee and transaction costs, if charged).

The unit price reflects the value of the fund’s investments. If the value of the investments rises, the unit price rises. Likewise, if the value of the investments falls, so does the unit price.

The pooled money is then invested and controlled by a professional investment manager in different asset classes that align with their investment objectives. Examples of these asset classes include shares, fixed interest, cash securities or property.

Managed investment schemes cover a wide variety of investments, including:

• cash management trusts
• property trusts
• Australian equity (share) trusts
• many agricultural schemes (e.g. horticulture, aquaculture, commercial horse breeding)
• International equity trusts
• some film schemes.
• timeshare schemes
• some mortgage schemes.
• Actively managed strata title schemes.

There are literally thousands of Managed Investment schemes in the market.

Managed Funds v’s Direct Investments

Direct investments are where you invest in and own the investment directly.  Direct Investments include residential and commercial property, direct shares held through a broker or via an online platform, or other riskier investments such as gold, precious coins, art or vehicles. 

The table below outlines some of the differences between Direct and Managed investments.

What types of Managed Funds are available?

There are five asset classes you can invest in: cash, fixed interest, property, Australian shares and international shares.  Each has its own level of risk as well as a potential return.

Managed funds can be used to invest in any one (or a combination) of these assets. The types of managed funds include:

What makes managed funds so attractive?

1. You can start small.

To invest in a managed fund, you need a smaller amount of money (as little as $1,000) to gain exposure to the various sectors of the market and dozens of individual stocks.

One of the keys to investing successfully is investing on a regular basis. Setting aside as little as $100 a month can add up to a substantial sum when you invest it regularly for longer periods. You can choose small monthly or weekly amounts and transfer your payments on the day you get paid.

2. It is an easy way to diversify your investments.

The beauty of managed funds is that you can access different asset classes, companies, industries, sectors and countries with a relatively small amount of money. Investing directly requires large sums of money to gain this range of exposure.

3. It is a cost-effective way to invest.

 Investing directly into shares or property comes at a cost. Expenses such as brokerage, stamp duty and agents’ fees can significantly affect the value of your investment. Costs for Managed funds have come down considerably over the last few years and are very cost-effective.

Managed funds allow you to access certain investments at a fraction of the usual cost. This is because you share these costs with other members of the fund rather than having to pay the minimum investment fee on your own.

4. Experts manage your money.

Your investment will be managed by professionals with the education, Focus, skill and education to make appropriate investment decisions. These experts have access to investment research and information not easily available to individual investors.

5. You don’t need to sell an entire house to access your money.

You can generally access your money within five to ten days after making a request. Accessing capital in direct investments, particularly property, can be very difficult, costly and time-consuming.

Managed funds have a major advantage over direct property investments in that you don’t have to sell the whole investment to access some capital. Or incur large transaction costs such as stamp duty.

Investment Concept 5: Simple vs. Compound Interest

Compound interest is one of the most effective strategies we employ. 

The graph below illustrates the difference in the value of an asset earning interest over 20 years on an initial investment of $10,000, assuming an annual return of 8% after fees.  Simple interest is interest paid on the original $10,000 and paid out to the investor every year.

With compound interest, interest is earned on the original $10,000, but interest is reinvested every year and earns more interest, growing the principal nearing more interest on that.

So, interest is earned on the original amount and the reinvested interest as well!

Investment Concept 6 – Dollar Cost Averaging

Dollar-cost averaging is a common strategy that advisers use to achieve the best outcome over time when investing your money. The way this concept works is like this:

This is where we invest regular amounts at regular times regardless of the market value and movements rather than try and pick the right time to invest or invest one lump sum. Over time, this strategy should average the value of your investment by smoothing out the differences in value over time. Here is an illustration of how dollar cost averaging works:

Ben’s Story…

Note: This example does not consider any distributions paid during this period. This is a general illustration of possible strategies only and is not an estimate of the investment returns you will receive or the costs you will incur. You should seek advice from a financial planner on your own personal circumstances before making an investment decision.

How this works

The above example illustrates how dollar-cost averaging has improved Ben’s investment position. He has managed to secure a lower average unit price ($7.07 instead of $8), and if he redeems his units now, he will make a strong return.

It is worth noting that dollar-cost averaging also helps maintain a disciplined approach to investing: when prices decline and many pull out of the market, you will continue to invest the same amount and acquire more units at a lower unit price. And when prices are high, and many rush back into the market, you will buy fewer units. It eliminates market ‘emotion’ from investment decisions and reduces the impacts of market peaks and troughs.

Investment Concept 7 – Investment Cycles

In volatile times, a simple model can help investors understand where we are in the economic cycle and what might come next. Fidelity International uses an ‘Investment Clock’ that links the performance of asset classes and equity sectors to the global economic cycle. Using the clock, we can estimate what phase we are in.

The Equity Sentiment Roadmap

How we help you Invest

Having a plan to secure your financial future can be a life-changing event. But investing requires you to make big decisions today about a future that is largely uncertain.  Markets are challenging because they are inherently unpredictable. Some recent twists and turns include Pandemics, Global financial crises, record-low interest rates, record rates of interest rate rises, high inflation, International wars and conflicts, intermittent volatility (market swings), and intervention by governments on a scale never seen before.

As an Adviser, our role is to help you plan for your future; we provide robust portfolio solutions to deliver outcomes based on our understanding of your needs. We build these investment portfolios to match your appetite for investment risk in order to deliver the best outcome for your specific needs.

Our portfolio solutions also incorporate market insights from our experienced research teams, coupled with high-quality investment managers.  The portfolios we provide have an investment strategy anchored by quality strategic advice principles, including:

1. Full understanding of your financial needs.
2. Efficient risk management.
3. Truly effective diversification.
4. Rigorous investment selection process and
5. Regular monitoring and reporting.

Notwithstanding the above, we also have an obligation to educate you and ensure you fully understand the process we are engaged in with you.  We believe that by the end of this process, you should know as much as we do about managing investments and understand the process we undertake for you.

Asset Allocation Terminology

Asset Allocation

Asset allocation is the process of determining how to spread an investment between categories of financial assets.  Asset allocation is generally driven by the desire to optimize the risk-return trade-off according to an investor’s time horizon and risk tolerance. Asset allocation does not assure a profit and does not protect against loss in a declining market.

Risk Tolerance

Risk tolerance is the level of risk you are willing to take to achieve an investment goal. The higher your risk tolerance, the more risk you are willing to take on. Higher-risk investments often have the potential for greater reward but also a higher potential for greater loss. Risk tolerance may be assessed through the scoring of a risk tolerance questionnaire.

Time Horizon

Time horizon refers to the period of time a sum of money is expected to be invested. Your investment time horizon depends upon when and how much money will be needed. In general, the shorter the investment time horizon, the less risk an investor should be willing to accept. Time horizons are often times stated as short-term (1-3 years), medium-term (3-5 years), and long-term (10+ years).

Portfolio Rebalancing

Portfolio rebalancing is the process of making adjustments to counteract the fact that different assets perform differently over time. These adjustments are made to correct the asset allocation drift that results from performance differences in your asset selections. You should consider rebalancing your portfolio at least once a year.

Correlation

Correlation is the technical term for comparing how different assets perform relative to each other during varying market cycles. Analysts measure this on a scale ranging from 1.0 (meaning the two assets move precisely in tandem with each other) to -1.0 (meaning they move in opposite directions).