Charting your financial future

Setting the course for your investment journey

Starting your investment journey can be daunting, especially when you have a significant amount saved. You’ve been prudent enough to set aside three to six months’ worth of emergency funds, and now you’re ready to explore how to grow your wealth over the long haul. Investing isn’t just a one-time event but a lifelong journey.

The key to successful investing lies in understanding your financial goals, your time horizon for each, and your risk tolerance. How soon you start can make a significant difference in your financial well-being in the future.

Balancing act: Present finances and future aspirations
The investment strategy that suits you best will largely depend on your comfort level with risk, your current financial situation, and your future aspirations. Unlike saving, investing has the potential for higher returns and increased risk.

As you approach retirement, it may not be the best time to go all-in on high-risk investments. Instead, a more balanced approach could involve opting for safer options like cash accounts or bonds while allocating a smaller portion to growth-oriented options such as stocks.

When cash or term deposits make sense
If you’re considering making a deposit payment for your first home, consider cash or term deposits. These conservative investment options can keep your savings safe in the short term.

Conversely, if you’re at the beginning of your career and saving journey, you might be willing to take on more risk for higher potential returns, especially if you don’t need immediate access to your funds.

Shielding your wealth from market volatility
Having a diversified investment portfolio can help shield your wealth from market fluctuations. Understanding the four main types of investments or ‘asset classes’ is crucial, each with its unique set of benefits and risks.

The appeal of defensive investments
Defensive investments prioritise regular income over growth. The most common types are cash and fixed-interest investments.

Cash investments, such as high-interest savings accounts, offer stable, regular income through interest payments. While they carry the least risk, the value of your cash could decrease over time due to inflation.

Fixed-interest investments, including term deposits, government bonds, and corporate bonds, can also provide a regular income. Term deposits lock up your money for a certain period at an interest rate often higher than a cash account. Bonds function as loans to governments or corporations, providing investors with regular interest payments and repayment of the bond’s price at the end of a fixed period.

The potential of growth investments
Growth investments, like shares and property, aim to increase in value over time, potentially providing income. While these investments may offer higher returns than defensive investments, they also come with a higher risk of loss.

Share ownership
In its most basic form, a share is a single piece of ownership in a company. These shares are typically traded on a stock exchange and are considered growth investments due to their potential to increase in value. This increase allows for a profit opportunity if you sell your shares at a higher price than what you initially paid.
Shareholders may also reap the benefits of dividends, a payout from a company’s profit distributed to its shareholders.

However, it’s important to note that the value of shares can also decrease, falling below your initial investment. Share prices are prone to daily volatility, making them more suited to long-term investors who can handle these fluctuations. Despite the potential for high returns, shares are often viewed as one of the riskier investment options.

Investing in property
Property investment holds similarities to share investing, with the potential for property values to rise over time. This increase presents the chance to make a profit by selling a property for more than its purchase price in the medium to long term.

Investments in property can take many forms, including:

Residential properties like houses and units
Commercial properties such as offices or office blocks
Retail premises such as shops or hotels
Industrial properties like warehouses

However, property prices are only sometimes guaranteed to rise, and properties can be harder to sell quickly compared to other types of investments. Property investment might not be your best choice if you need easy access to your funds.

Understanding returns
Returns are the profits you earn from your investments. These returns can come in various forms depending on where you’ve invested your money:

Dividends from shares
Rent from properties
Interest from cash deposits and fixed-interest securities
Capital gains or losses are the difference between the price you paid for an investment and the price you sold it for.

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