Understanding Investments
Give your financial future the best chance for success, by understanding your options, whether it be cash, fixed interest and bonds, shares and equities and property.
Cash
Cash investments encompass products such as bank accounts and cash management trusts, as well as other short term deposits. They allow easy access to your money when you need it. Cash is the most stable investment, with virtually no risk of loss over the short term, but with historically poor returns over the long term. The main risk with cash investments is that they may not keep pace with inflation and the purchasing power of your money could be eroded.
These type of investments are usually suitable for short-term savings where you can’t afford any risk to your capital. For example, if you put $1,000 in an interest bearing term deposit, at the end of the term your $1,000 should be returned and in the meantime you would have received interest income.
Fixed Interest/Bonds
Fixed Interest investments are securities, such as bonds, that are issued to investors who lend money to a Government, public authority or a major public company. In effect, you loan your money for a set amount of time. The borrower (i.e. the government) pays interest, usually at a fixed rate, on the loan over an agreed period. Fixed interest investments will generally provide a better return than cash but do carry a slightly higher risk.
These investments are suitable for investors who are seeking a higher return than cash but who want a low risk investment. They are unlikely to produce the same level of returns as growth investments such as shares and property.
Shares/Equities
Shares (also known as stocks or equities) are issued by companies to allow an investor to own a part of the company and become entitled to share in its future value and profits. Share prices are driven by many factors, including market forces and company performance, so tend to fluctuate. For this reason, shares are said to be a volatile investment in the short term. Shares are generally referred to as ‘growth assets’ because they are considered likely to produce an increase in capital value over the long term. They may also produce an income stream through dividends on company shares.
This type of investment is generally suitable for investors who are looking at a medium to long-term investment plan (usually 5+ years) and are comfortable with some volatility in their investment value over the short term in exchange for higher returns over the long-term. For example, an initial $1,000 investment in a parcel of shares may grow to be worth $1,500 in 5 years time. This growth would reflect an increase in the share price over that period.
Property
Property is one asset class that most Australians are familiar with. Investments in property can be either direct or indirect. A direct property investment is made by actually buying real estate, such as the family home, land developments, factories, shops and office buildings, while an indirect investment is made by investing in a property securities trust. Property is a growth investment that is expected to produce good long term returns, but with an accompanying increase in volatility. However, historically the volatility level associated with property is slightly lower than that of equities/shares.
Property investments are generally best suited to investors who are looking for long-term investment timeframes (5+ years) and like shares, property prices can fluctuate and have periods of sustained high returns and sustained low returns, so property is generally only suitable as a long-term investment.
Why invest in managed funds?
There are two ways an investor can invest money - either directly (where the individual researches, buys and holds the investments themself) or indirectly (through managed funds, where their money is pooled with money from other investors and managed by a professional fund manager).
Many investors find managed funds a far more convenient and practical way to arrange an investment. Managed funds invest across all the major types of assets (cash, fixed interest, shares and property) so offer lowered risk through diversity.
Professional fund managers decide what percentage of the fund should be invested in each asset class, and also which countries, industries and companies have the best prospects for good returns. You can choose from funds where the manager decides the mix of the different types of assets. Alternatively, you can choose a fund that allows you to select your own mix of investments.
It’s usually a good idea to seek out a specialist to help you work out which individual investment opportunities make sense for you. For example, working with a financial planner may help you sort out the often complex steps involved in achieving financial security. They can help you identify what short and long-term investments suit your needs, balance your investment portfolio with insurance to protect your personal and physical assets, and help you design a tailored plan to achieve your financial goals.
Managed funds are an ideal option for people who are new to investing or for those people who are happy to outsource the selection of investments to a professional manager and are seeking diversification to minimise risk.
Why invest regularly?
One of the best ways to achieve your financial goals is to contribute a regular amount of money, on a regular basis, into a managed fund. This is known as dollar-cost averaging. Sticking with this approach through both good and bad markets can have positive results. The reason being when market prices are falling, you are automatically buying more units in the funds. When prices start to rise, you buy fewer units. Because of this, the average cost of your units will be below the average market price of all the units.
The other advantage to contributing additional money to investments on a regular basis is known as compound interest. Each time your investment generates earnings (i.e. interest), those earnings are added to the original principal investment. This new principal balance, in turn, generates additional earnings that are again reinvested. It's interest earning interest!
Why multi-manager?
Wouldn’t you like to have an all-star fund manager at every position in your investment portfolio? This is the essence of multi-manager investing as it is practiced by Russell.
If you were going to build a portfolio on your own similar to what Russell offers, you would have to:
- devote the necessary resources to research and analyze money managers around the world
- know what has made managers successful
- know how to assess qualitative and quantitative success factors
- have technology to support decision making
You would have to look beyond performance to evaluate the likelihood that a money manager will be able to produce consistent benchmark-beating returns over the long term.
Clearly, the responsibilities are overwhelming even for a sophisticated investor.
Russell's world-class research of investment managers travels the globe rating money managers according to their asset-class or style specialty. Complementary managers are then chosen and mixed in individual funds. This process brings increased diversification meant to produce consistent, risk-aware performance.
It allows investors of all sizes to forgo the often time-consuming and confusing process of selecting funds or managers for each asset class or style necessary to compose a diversified portfolio of many different parts.
It's our job to dig deeper... to uncover layers of insight that individual investors don't have the access to analyse. You won't have to worry whether a manager is drifting from their investment style, whether key staff members are leaving a money manager, or whether a stronger choice has become available.
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