How to InvestInvestment Asset ClassesBorrow to Invest

How to Invest

The first issues to consider include the purpose of the investment, the time horizon of your investment; your need or preference for income or growth oriented investments, tax implications and your capacity to tolerate variation of investment return

Income versus capital growth

When designing a portfolio it’s important to achieve a balance between income and capital growth.

Income-producing investments

Income-producing investments generally offer high capital security. These investments include bank deposits, mortgages and debentures with major finance companies. A disadvantage of income-producing investments is the returns are fully taxable. Also, income-producing investments provide good security of capital but no additional growth potential to maintain purchasing power.

Capital growth investments

Capital growth investments include property, Australian and international shares. They also include more specialised investments, such as infrastructure and commodities. Capital growth investments rely on an increase in the capital value of the asset purchased, and for some investments in combination with tax effective income.

Invest directly or use professional management and expertise

Direct investments have the advantage of being hands on, engaging and very satisfactory when they make good returns. However, they do require thorough research and ongoing in-depth monitoring. Retail investments are also limited in access and for the investment amounts required.

Fund managers have the time and expertise to monitor and research investment opportunities and apply their experience to manage investment portfolios across all asset classes.

Most stockbroking firms charge between 1.5% and 2.5% for every transaction made by a client (buy, sell or switch). The buy and sell price, transaction fees and stamp duty charges of a direct investment may easily exceed the total costs of an average managed investment. Similarly, with property, the total costs to buy, sell, hold and manage may, if properly accounted for, far exceed total unit trust costs.

Diversification & protection

Managed investments provide access to a large pool of funds. Fund managers are able to diversify the spread of investments across all assets classes.They can provide access to investments that may not be readily available to individual investors, for example, large retail property complexes and international shares.

Some fund managers are also able to protect a portfolio against losses, either fully or partly.

Flexibility

It’s important to have a flexible investment portfolio. Today’s investment environment is a dynamic one. Changes in tax rules, the economy, Social Security, your own income and expenditure requirements, and investment markets mean you may need to alter your portfolio simply and quickly.

We can help you

  • Identify and outline the issues & options for your investment planning.
  • Recommend an appropriate investment strategy
  • Determine the optimal asset allocation for your investment purpose
  • Build an investment portfolio tailored to your specific situation
  • Research and recommend appropriate investments within each asset class
  • Recommend the most beneficial structure and ownership of the assets
  • Assist with applications and implementation
  • Be available with ongoing advice and review

Investment Asset Classes

Cash

The most appropriate investments for emergency funds include: bank accounts; credit union accounts; or cash management trusts. These investments are secure as they generally invest in short-term government and bank-backed interest bearing securities.

Fixed income

Income producing investments generally have the advantage of high security. These investments include debentures with major finance companies, bank deposits, mortgage investments, cash management trusts etc.

A debenture is a loan security issued by a company and is secured by a charge over the assets of the company. The investor receives a guaranteed rate of interest and repayment of capital at a specified date in the future. The earnings rate reflects the credit rating of the company. The higher the potential yield the greater the risk.

The disadvantage of interest bearing investments is the taxation liability on the income produced. Therefore, income-producing investments provide good security, but very low real rates of return, even a negative result in some cases. Additionally, most income producing investments provide no capital growth to protect against the effects of inflation.

Shares, Property & Infrastructure

There are two major advantages of capital growth investments.

First, by diversifying across sectors other than fixed interest, it’s possible to take advantage of favourable investment conditions that provide superior growth over the medium to long term.

Second, capital growth is subject to capital gains tax, which is much lower than comparable income tax. Another factor relating to capital gains tax is it’s not payable until the investment is sold. Therefore any tax liability is deferred into the future, at which time lower personal tax rates may apply. Capital growth investments may enable better management of your taxation position to suit your circumstances. Historically, capital growth nvestments have outperformed income-only investments.

Dividend imputation

Many Australian companies issue franked dividends. From a taxation perspective, investors who receive a franked dividend are assessed on the dividend received. However they will be entitled to claim a tax offset (a franking credit) for the underlying taxes already paid by the company. The credits can be used to reduce tax payable on other income.

For superannuation investors, dividend imputation is received by the superannuation fund and passed on to investors via higher returns on the investment.

Depreciation

Property and infrastructure are more income oriented growth assets than shares. Income from these assets may often be deferred due to distributed depreciation. The income, however is not as tax effective as from franked shares.

Diversification

Investment sectors move in cycles, so to reduce volatility and risk in your portfolio it is necessary to diversify your investments. A diversified portfolio is a fundamental strategy to successful wealth creation. Diversification enhances the security of a portfolio, and the consistency of long-term performance, without unduly reducing overall returns. In some cases, diversification enhances overall returns.
Diversification means investing across different asset classes such as cash, fixed interest, shares and property. Within these asset classes, there are many sectors which allow further diversification. Such sectors include government, semi-government and corporate securities, international investments, industrial and resource shares, and property.

Investment Risks and Returns

The long-term risk/return trade-off between different asset classes is shown below:

risk_return_trade

Two important strategies exist that significantly reduce investment risk, while gaining exposure to higher returns from more volatile investments:

  1. Spread investments amongst all asset classes
  2. Invest for the longer term.

Historical evidence shows that assets with greater risk produce greater returns over the long term, however, in the short term they are subject to greater variability in their returns. Assets with less risk tend to produce lower returns over the long term, but with less variability in their returns.

We can help you

  • Identify and outline the issues & options for your investment planning.
  • Recommend an appropriate investment strategy
  • Determine the optimal asset allocation for your investment purpose
  • Build an investment portfolio tailored to your specific situation
  • Research and recommend appropriate investments within each asset class
  • Recommend the most beneficial structure and ownership of the assets
  • Assist with applications and implementation
  • Be available with ongoing advice and review

Borrow to Invest – Investment Gearing

It is possible to increase assets/wealth by borrowing money and investing in growth assets, and thereby get access to investments that otherwise not would have been possible.

If the assets increase in value, the earnings will increase in the same proportion as the gearing. However, losses will also be amplified in the same proportion. It is therefore always important to ensure there is sufficient cash flow and tolerance for worst case scenario losses, before entering into a gearing arrangement.

Provided the assets grow in value over time, negatively geared investments should eventually generate a positive cash flow as the income from the assets increase in line with the value of the assets and borrowing costs remaining constant (subject to interest rates remaining stable).

The interest expense may be fully tax deductible at marginal rates. The income is taxed at marginal rates. If the income consists of franked dividends then it is entitled to a franking rebate. Provided the assets are held for at least 12 months, 50% of the capital gain is exempt from tax.

Gearing into investments assets can also be successfully used to replace non deductable debt for tax purposes, such as a home mortgage, with fully tax deductable investment loans.

We can help you

  • Identify and outline the options, issues and structures available to you
  • Make recommendations on strategies
  • Identify and calculate an appropriate level of gearing for your circumstances
  • Recommend the most beneficial structure and ownership of the geared assets
  • Assist with applications and implementation
  • Be available with ongoing advice and review
Investments

 

We will help You understand:

 

  • Wealth creation
  • Investment structures
  • Tax effective investment strategies
  • Goal based investments
  • Investing for growth
  • Investing for income
  • Investment gearing
  • Asset allocation
  • Australian investments
  • International investments
  • Superannuation investments
  • Managed funds
  • Share investments
  • Listed Property investments
  • Investment Property investments
  • Infrastructure Investments
  • Fixed interest investments, incl. Bonds, Bank-Bills & Cash
  • Commodities Investments
  • Guaranteed investments

To find out more:

 

 

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