There are many options for investing your surplus income or spare cash at bank, and they range from low to high risk. How you invest should ultimately align with your risk tolerance and your investment time frame.

Firstly, what is risk tolerance?

This is the level of risk you are comfortable with taking in order to achieve your financial goals.

A good way to gauge this is to imagine you have $100,000 in your bank account, which you have saved up from years of hard work and sacrifice. Now imagine if that $100,000 was to drop to $70,000 in 12 months. How would this make you feel? If the very thought of losing 30% of your hard-earned cash send shivers down your spine, and would cause many sleepless nights, then having a large proportion of your portfolio invested into higher risk assets such as ‘direct shares’ or ‘listed property’ may not be for you. You may be more suited to defensive assets such as term deposits or other fixed interest alternatives (bonds, capital notes etc.).

However, if you are prepared to weather some short-term volatility in exchange for the potential of a higher rate of return, then your risk tolerance is likely a bit higher. We can help you work out your risk tolerance, to ensure you gain peace of mind in your investment approach. This leads to our next consideration, investment time frames.

What is an investment time frame?

This is the length of time you are prepared to invest your money, in order to generate a return on your investment. If you are about to retire from the workforce and are soon to rely on your savings/super to survive in retirement, your investment time frame is considerably shorter than someone who is just starting their portfolio, and intends to invest for the next 30 years.

A long-term investor has time to ride out the ups and downs of the economy, whilst a retiree may not have time to wait 5-6 years for a market recovery (approximate length of time for a broad-based share portfolio to recover from the Global Financial Crisis in 2008/09), and that’s why its important to align your investments with your time frame, to ensure no nasty surprises.

Despite the volatility of the share market, history has shown that sensible, longer-term investors have been well rewarded for their patience and discipline, with Australian Shares returning on average 9.1% p.a. for the last 30 years. (1989 to 2019)

Okay, so what’s next…Diversification.  

Once you have determined both your risk tolerance and investment time-frame, you will be in a much better position to make decisions about your investments. As a general rule, regardless of whether you are a short- or long-term investor, the idea of diversification comes into play.

Diversification is the spreading of risk across a number of different asset classes, in order to reduce concentration risk… e.g. the old adage “don’t put all your eggs into one basket

If you are looking to purchase $200,000 of shares, instead of investing your entire savings into one share/company (eg Telstra), you can spread your purchases across a number of sectors such as mining (BHP), telecommunications (Telstra), healthcare (Ramsay) and Utilities (Spark).  By diversifying your portfolio, one stock underperforming can be offset by gains in other assets in your portfolio over the same period of time.

At Humble Goode Financial, we are strong believers in diversification, and will help you make wise investment decisions, to minimise volatility and provide a well-balanced portfolio to help you grow your wealth long term. We utilise Listed Investment Companies (LIC’s) and Exchange Traded Funds (ETF’s) to help our clients build well-diversified, income generating portfolios.

As the name suggests, a Listed Investment Company is exactly that, a listed company that invests into shares as its sole purpose. By holding a LIC, you can get exposure to a wide range of top ASX 200 shares simply by holding one stock. On top of the diversification benefits, you also have substantially reduced brokerage fees and the potential to earn income whilst you invest, via fully franked dividends.

Dividends, what are they and how do they work?

Besides growth in the value of a share, there is another way you can get a return on your investment with share trading, and that is via dividends.

Dividends are a payment from a company to its shareholders (using the company’s profit), which is a reward to the shareholder for showing faith in that company. As a part owner of a publicly listed company (no matter how small your stake), you should be rewarded when that company performs!

The value of dividends paid to you per annum divided by your total investment into that company can help you work out your total return on equity as a percentage. For those who have an investment property, dividends are like rental income received. The value of an investment property (like the value of a share) is really irrelevant if you are holding it for the long term. What matters is the income that your asset generates.

With term deposits offering all time low interest rates, an investment into shares can provide a stronger return on your investment (eg 1.5% term deposit vs 5.5% grossed up dividend yield p.a.), but as discussed above, your investment time frame is important too. You should only ever invest surplus cash you do not need quick access to (within 12/24months).

Why not give Humble Goode Financial a call today to discuss your future investment into the market.

We have access to a wide variety of investment options and can explain them to you in easy to understand terms, so you can make an educated decision about your future.