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Friday, 23 March 2007 | |
Strict Standards: Non-static method HTML_content::TOC() should not be called statically in /home/livenow/public_html/components/com_content/content.html.php on line 525 What is involved in investing? Whatever your reason for investing it is important to select an investment that suits your needs and objectives. Key elements of your investment plan should include:Your Tolerance Toward Risk You will need to understand the risks associated with your investment. Risk is normally measured in terms of the likelihood or probability of your investment achieving an expected return over a given period of time. Returns from lower risk investments tend to be more certain and higher risk investments less certain. Risk is also considered in terms of volatility of return or the expected range of returns that might be expected from your investment over time. With higher return comes higher risk. Your tolerance toward risk can help determine particular investments that may be inappropriate for you. Of course, lower risk investments will likely provide a lower return so there may be a trade-off as to the likelihood of achieving your financial goals. Investment Horizon You will usually need to achieve your investment objectives within a specified time frame. This is your investment horizon and could be short, medium or long term. Generally, the longer period you have to invest the more risk you are able to accept since the impact of fluctuations in return or volatility tends to reduce over time. You may still require confidence and steadfast determination in your investment strategy though to brave market downturns. Need for liquidity Your personal circumstances can change so before making an investment it is important to consider how quickly you might convert your investment to cash. Some investments are highly liquid while others may provide little or no liquidity. For example it may take up to six months or longer for you to sell a direct property investment. Structuring Your Investment The return you achieve on an investment will be subject to tax. It is therefore important for you to consider the potential taxation consequences of your investment prior to investing or changing an existing investment. Consideration should be given to selecting an appropriate legal structure to legally minimise tax. An investment might be best held in your personal name or through a separate structure such as a superannuation fund or allocated pension for retirement monies and a trust for non-super monies. Diversification Diversification or spreading your risk across a number of investments is an important part of any well structured investment plan. Incorporating a mix of investments in your portfolio can help to reduce the impact of fluctuations in return from any single investment. You should look to diversify across a number of investments providing an attractive return. Individual investments should be considered in the context of your overall portfolio and financial position. Ongoing Investment Review An investment plan is not about setting and forgetting. Once a plan has been prepared and implemented, you will need to revisit it periodically to track progress and to make adjustments when necessary. Fine tuning of your portfolio will ensure it is continues to run smoothly and keep your dollars working hard for you. Managed Funds A managed fund is a collection of stocks, bonds, property, infrastructure or other securities. Investors pool their money into the fund and purchase shares of the managed fund that is then managed by a professional investment company. Investments in these managed funds are designed for the medium to long term time frame. This range is from 5 to 7 years. A typical managed fund holds anywhere from 20 to 40 different securities that offer some measure of diversification - a sharp decline in an individual security won't be nearly as damaging to your portfolio as it would be if you only owned a few securities. Managed funds are professionally managed. Some of the finest managers in Australia and overseas devote their attention to buying and selling securities according to the goals of their funds. And managed funds often have a minimum investment of only $1,000 - some will accept even less. When you buy into a managed fund, you are usually one of many investors in that fund. This "pooling" of money provides the individual investor with a number of benefits including: The investments are managed by a team of investment professionals who concentrate on managing your money - something most people don't have the time or the expertise to do. Small investors can access investments that may otherwise be out of reach. The costs of investing and managing investments are spread over the whole fund pool delivering greater cost efficiencies for the individual investor. Types of Managed Funds The term "Managed Investments" covers a wide range of pooled investment products from superannuation to pensions and many other forms of saving schemes. Below are descriptions of a wide range of different types of investment types. Within these broad terms, which relate principally to the tax effect of the investment, investors' have huge choice depending on how much risk they want to take (see Investment Types) and what sort of companies and industries they want to invest in (see "Investment Options") Tax Paid Investments Insurance Bonds The key features of insurance bonds are summarised below:
Friendly Society Bonds The key features of Friendly Society Bonds are summarised below:
Investment Trusts There are a number of different types of investment trusts. The key features of each are summarised below: Unit Trusts
Unlisted Unit Trust You may withdraw your investment directly from the trust at the unit value which is determined in accordance with the valuation principles in the trust deed. Wholesale Unit Trust Usually designed for institutional (large scale) investors and is subject to a minimum investment amount of $500,000. Listed Unit Trust Listed on the Australian Stock Exchange. There is no facility to withdraw your money directly from the trust. Units are bought and sold via a stockbroker and are subject to stock market fluctuations.
Master Funds The key features of a masterfund are summarised below:
Superannuation Superannuation products are designed to take maximum advantage of the tax benefits offered to people saving for their retirement. Fund earnings (returns) are only taxed at 15% and this tax is paid by the fund (not by the investor). Most tax is effectively deferred until you retire or withdraw your investment from the superannuation environment. The taxation rules applying to superannuation are complex and should be explained in more detail in the brochure for any superannuation product. There are a number of superannuation/Rollover alternatives. The key features of each type of superannuation/rollover fund are highlighted below:
Deferred Annuities (DA's)
Superannuation Bonds
Superannuation Trusts
Allocated Pensions and Allocated Annuities Retirement products allow you to invest your superannuation payout into a pension account so you can have regular income and defer the tax that you pay. The Government wants retirees to fund their own retirement (rather than rely on the age pension) and there are a number of concessions if you invest your superannuation money into one of these pension paying products. To receive these concessions, you must receive a minimum income stream which consists generally of the earnings on the investment plus some return of capital (your original investment). This is why these products are often referred to as "cash back pensions". Over time the lump sum you invested reduces. If you are aged 55 or over, investment earnings (returns from the fund) are not taxed. You pay tax on income at the time pension payments are made. Allocated Pensions and Allocated Annuities The key features of allocated pensions and allocated annuities are summarised below:
The key features of immediate annuities are summarised below:
Investment Options Some investments are riskier than others and some produce greater return. Seeking greater returns will always entail taker greater risks. With managed investments choosing the right product with the level of risk that suits your circumstances and attitudes is very important. This section describes the most common areas of investment for Australian Managed Funds. Capital Guaranteed
Diversified - Stable
Diversified - Balanced
Diversified - Growth
Sector Funds
Australian Share Based Funds These funds invest in Australian listed securities with some allocation to cash in order to manage liquidity requirements. There are a number of variations of Australian share based funds which can be differentiated by their investment strategy in focussing on different areas of the Australian share market. Imputation Funds These funds predominantly invest in companies that pay franked dividends and offer potential for solid capital growth over the longer term. Australian Share Based Smaller Companies Fund These funds focus on investing in smaller companies (as measured by their stock market capitalisation) that provide the potential for strong growth over the longer term. Australian Share Based Resource Companies Fund These funds invest in Australian companies whose primary business is involved in mining and/or mining services. The focus is on those companies likely to provide strong capital growth over the longer term. Australian Fixed Interest Based funds These funds primarily invest in Australian fixed interest securities such as Commonwealth Government Bonds, State Government Bonds, corporate bonds, convertible notes, capital notes, mortgage-backed securities and preference shares. Cash Based Funds These funds invest in cash and/or cash equivalents such as bank bills, certificates of deposit and treasury notes.
International Share Based funds These funds invest in companies listed on other country's (outside Australia) stock exchanges with the aim of providing investors with strong capital growth over the longer term. International share funds come in two forms as described below. Global Share Funds Global share funds invest in company shares from a wide number of countries where the investment manager decides the country allocation of the fund. Country Specific Funds These funds invest in company shares of a specific country or region. For example, a South East Asian share fund would invest in shares listed on stock exchanges from the South East Asian region. International Fixed Interest Based Funds These funds invest in the fixed interest securities of overseas countries. This can include investment in Government and corporate bonds. Property Based Funds These funds invest in property based assets such as physical property (buildings) and/or property securities (listed property trusts). Dividends What Are Dividends? When considering the profit they make on shares, many investors assess the gains they have obtained based on the appreciation of the share on the open market or the gains they obtained after selling the share for more than the original purchase price. However, it's also wise to include the income acquired from share dividends, if any. Dividends are taxable payments to shareholders from a company's earnings. These payments generally come from retail profits and tend to be distributed in the form of cash or stock. They are usually paid quarterly, and the amount is determined by the company's board of directors. Dividends are most often quoted by the dollar amount each share receives, put simply, the dividends per share. They can also be stated in terms of a percent of the current market price, designated as a dividend yield. The dividend yield is the annual dividend income per share divided by the current share price. Many mature, profitable companies offer regular dividends to shareholders. However, if a company experiences losses during the year or needs any earnings to be reinvested back into the business, it's always possible that it could decide to suspend dividends. It's important to remember that a company can decide to increase, decrease, or stop paying dividends at any time. Rather than pay dividends to shareholders, many companies with current high growth rates choose to reinvest their earnings back into their businesses. On the other hand, some stable companies that haven't experienced much growth might pay dividends to provide an incentive for investors to purchase their stock. When investing in the share market, it's important to remember that the return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Risks to Investing What Investment Risks Should I Know About? Taken by itself, the word "risk" sounds negative. But broken down into what it really stands for in terms of investing, it begins to be a little more manageable. By understanding the different types of risk and keeping an eye on your investments, you may be able to manage your money more effectively. Remember, strategic investing doesn't mean "taking chances" so much as "making decisions." Long-term investing and diversification may be some of the most effective strategies you can use to minimise investment risk. Inflation Risk The main risk from inflation is the danger that it will reduce your purchasing power and the returns from your investments. If your savings and investments are failing to outpace inflation, you may wish to consider investing in growth-oriented alternatives such as shares, managed funds, annuities, or other vehicles. Interest Rate Risk Bonds and other fixed-income investments tend to be sensitive to changes in interest rates. When interest rates rise, the value of these investments falls. After all, why would someone pay full price for your bond at 6 percent when new bonds are being issued at 8 percent? Of course, the opposite is also true. When interest rates fall, existing bonds increase in value. Economic Risk When the economy experiences a downturn, the earnings capabilities of most firms are threatened. While some industries and companies adjust to downturns in the economy very well, others - particularly large industrial firms - take longer to react. Market Risk When a market experiences a downturn, it tends to pull most of its securities down with it. Afterward, the affected securities will recover at rates more closely related to their fundamental strength. Market risk affects almost all types of investments, including shares, bonds, real estate, and others. Historically, long-term investing has been a way to minimize the effects of market risk. Specific Risk Events may occur that only affect a specific company or industry. For example, the death of a young company's president may cause the value of the company's share price to drop. It's almost impossible to pinpoint all these influences, but diversifying your investments will help manage the effects of specific risks. Dollar Cost Averaging What Is Dollar-Cost Averaging? Every investor dreams of buying into the market at a low point, just before it hits an upswing, and garnering a large profit from selling at the market's peak. But trying to predict market highs and lows is a feat no one has ever fully mastered, despite the claims by some that they have just the right strategy that enables them to buy and sell at the most opportune times. Attempting to predict which direction the market will go or investing merely on intuition can get you in trouble, or at the very least may cause you a great deal of frustration. One strategy that may help you avoid these investing pitfalls is dollar-cost averaging. Dollar-cost averaging involves investing a set amount of money in an investment vehicle at regular intervals for an extended period of time, regardless of the price. Let's say you have $6,000 to invest. Instead of investing it all at once, you decide to use a dollar-cost averaging strategy and contribute $500 each month, regardless of share price, until your money is completely invested. You would end up purchasing more shares when prices are low and fewer shares when prices are high. For example, you might end up buying 20 shares when the price is low, but only 10 when the price is higher. This strategy has the potential to reduce the risk of investing a large amount in a single investment when the cost per share is inflated. It also helps protect an investor who tends to pull out of the market when it takes a dip, potentially causing an inopportune loss in profit. Dollar-cost averaging is a long-range plan, as implied by the word "averaging." In other words, the technique's best use comes only after you've stuck with it for a while, despite any nerve-racking swings in the market. When other panicky investors are scrambling to get out of the market because it has declined and to get back into it when the market has risen, you'll keep investing a specific amount based on the interval you've set. Note: Dollar-cost averaging does not ensure a profit or protect against a loss in declining markets. This type of investment program involves continuous investment in securities regardless of the fluctuating price levels of such securities. Investors should consider their financial ability to continue making purchases through periods of low and high price levels. The return and principal value of shares fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. |
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Last Updated ( Friday, 23 March 2007 ) |