While there are plenty of potential investment options for you as an investor, your choice ultimately boils down to a few key asset classes – stocks, property and cash (and its equivalents). The path that you choose to go down will depend on many things, with your current financial situation, your goals and aspirations and your risk appetite being a few key considerations.
Here are a few things to consider as you choose between these asset classes on your journey as an investor:
Considered a part of the ‘Great Australian Dream’, most of us strive to one day own property. As a physical asset, property provides a sense of security over other intangible investments and is often considered a safe choice. When investing in property, you can not only expect returns through rental income, but you will also benefit from the appreciation in the value of land during the point of sale.
But while property investments can provide lucrative returns, there are a few things to keep in mind. Purchasing property requires a large amount of capital, and for most people, this involves taking on debt in the form of a mortgage – a long-term commitment. Additionally, property requires significant ongoing investments in terms of time and money – largely spent on maintenance and sourcing suitable tenants.
Finding tenants can especially be problematic if you are relying on rental income for your mortgage repayments. On the flipside however, paying off your mortgage and releasing equity will allow you to further expand your portfolio and invest in other properties – helping you to steadily climb the property ladder.
Stocks can provide high returns in the form of share price appreciation and dividends, but carry the risk of capital loss due to volatility in the markets. Despite this, adhering to a few key principles will provide the opportunity to make the most of what stocks have to offer.
To begin with, always do your research. Only invest in fundamentally strong companies that will stand the test of time. The markets are volatile, and stock investments will always be accompanied by risks – but investing in sound companies that can weather the storm and bounce back up will eventually provide you with great returns.
Another thing to keep in mind is that time in the market is better than timing the market. No one can predict how the markets will move, and trying to buy low and sell high in the short-term will only leave you disappointed. Investing for the long-term provides a number of benefits – it allows you to take advantage of compounding, it smoothens volatility and it helps you to make informed decisions. Read more about why you should invest over the long-term in our article here.
Cash and its equivalents
If you are extremely risk averse, you may simply choose to hold your funds in cash. While being extremely liquid, cash isn’t the best way to hold your money given that it loses value due to inflation. Despite this however, it is always a good idea to hold at least some of your money in cash in the event of an emergency.
Alternatively, you can allocate these funds into fixed income assets such as corporate and government bonds which are viewed as low risk investments that provide a stable return. Investing in bonds will provide returns in the form of interest paid out in regular instalments throughout the life of the bond. While being reliable, bonds do not offer the same level of rewards when compared to stocks or property.
Keep in mind that each asset class will have its pros and cons, and will add value to your investment portfolio in different ways. This is why having an asset allocation which suits your requirements is so important. To read more on asset allocation, please refer our article here.
If you are unsure about which asset classes you should be investing in – and in which proportions – it might be a good idea to speak to a financial planner that can guide you and develop a portfolio that will achieve your goals and aspirations.