Investment
Choosing your investment strategy
With the wide choice of investment options available today how do you know which is the right strategy for you? You can choose from single sector funds like Australian share and international share funds, or diversified or multi-sector funds that include a mix of sectors like shares, fixed interest and property.
Here are some factors to consider before choosing your investment strategy.
Investment types and risk
All investments carry some level of risk. The type and degree of risk will vary depending on the investments you choose - usually the higher the risk the higher the potential return.
This graph shows the relationship between risk and return for each asset class.
Risk is measured in terms of the likelihood of achieving a negative return in any one year - the higher the risk level of an asset class the higher the likelihood of achieving a negative return.
Higher risk asset classes like shares are long-term investments, which means the longer you are invested the less likelihood of your investment value falling. More on asset classes.
Diversification
Spreading your money across a range of investments is one of the best ways to reduce your exposure to market risk. This way you are not relying on the returns of a single investment. Investment markets move up and down at different times. With a diversified portfolio of investments, returns from better performing investments can help offset those that underperform.
Holding a broadly diversified portfolio can also improve your performance potential and increase your chances of being exposed to market growth.
Getting your asset allocation right
Research confirms that how you allocate your assets to each asset class is more important to long-term performance than the individual stocks you choose.
Some investors prefer to leave the asset allocation decision up to a fund manager and invest in a diversified fund so they don't have to worry about monitoring and rebalancing their portfolios.
Investors who want more control over their investments may decide to make up their own asset allocation by selecting individual asset class funds. If you decide to use this approach, you will need to be disciplined and monitor your investments on an ongoing basis and rebalance your investments in line with your asset allocation targets. Alternatively, you could ask your financial adviser to do this for you.
Your investment profile
Before choosing your asset allocation you will need to consider factors such as your:
- short, medium and longer-term investment objectives
- investment timeframe
- attitude to risk and return
- current circumstances, limitations and future prospects
The above factors will help you, or your adviser, identify your investment profile so you can determine the most suitable asset allocation for your needs.
Risk/return profiling is a tool used by professional and novice investors alike when determining investment profiles. It can be a detailed and individual process, so it is best completed under the guidance of a professional financial adviser.
Fund managers typically divide investors into four standard investment profiles based on their risk appetite.
| Conservative | Low | Invests around 60 to 70 per cent of assets in income assets such as fixed interest and cash. Focus on capital stability and income rather than growth. |
| Balanced | Average | Maintains a balance (e.g. 50:50 or 60:40) between growth and income assets. This strategy aims to balance risk and income with long-term capital growth. |
| Growth | High | Invests around 70 to 80 per cent of assets in growth assets such as shares and property. Aims for higher growth over the long-term while cash and fixed interest exposure limits risk. |
| High growth or aggressive | Higher | Invests around 90 per cent of assets in growth assets such as shares and property. Focus is on long-term growth. |
Sometimes life doesn't go to plan, so remember to review your investment strategy if there are any major changes in your circumstances. If you need help, a professional financial adviser will be able to determine the best investment strategy for your stage of life and financial situation.
