When it comes to investing there are many different investment options available, however, most investments fit into one of four asset classes.
Cash investments include the short term holding of money; e.g. bank accounts and cash management trusts.Cash investments provide quick and ready access, stable income but lower returns.
Fixed interest investments involve lending money - to a bank, company or government; e.g. term deposit,debenture or bond. They are a short to medium term investment.
Property investments involve owning 'things' e.g. residential, commercial, retail property. You can invest in property directly or indirectly (purchasing units in a property trust). Property investments are a medium to long term investment.
Share investments also known as "equities" involve buying parts of businesses. Share investments are another medium to long term investment.
Investing involves risk. Risk is the chance that an investment will not give you the returns you hoped for, or that you will lose money. Almost all investments have risk, but some have more than others.
Generally, investments that are expected to pay higher returns involve more risk. While these investments are likely to produce higher returns over time than more conservative investments, over short periods they can fall in value and lose money. These sort of investments are called "growth" assets. Examples are Australian and international shares and property. It is important to note the longer the time needed to benefit from the risk taken with 'growth' assets. The more conservative investments, such as cash, are called "defensive" or "income" assets.
Generally, the higher the level of risk when investing, the higher the potential return (or loss) will be. This is called the risk/reward trade-off. Understanding this trade-off and the particular risks of concern to you is a vital element in any successful investment strategy.
When setting your financial goals, deciding on the structure of your investment is crucial to managing risk. There are a few things you should keep in mind that can help control risk such as choosing investments appropriate to your time frame, your risk profile and diversifying across assets.
When you invest your money, you need to set a timeframe, that is, you'll need to decide whether you are investing to meet short term needs such as saving for a car, children's education or investing to meet income needs in retirement.
You can spread your money across different countries, individual investments or investment managers. The idea is to reduce the impact that any one of your investments would have on the total value of your investments, should it perform badly. Assets move in different economic cycles so when shares do badly, bonds or property might do well, or vice versa. This helps reduce risk and increase your returns.
The golden rule when it comes to investing is not to put all your eggs in the one basket. Diversify!