“I have $5000 saved, what should I do with it?”
From shares and term deposits to property and bonds, finance expert Anthony Bell explains where you can achieve the greatest benefit from investing your hard earned cash.
It is the age old question; do I spend my dollars today, or save them for future consumption. And if I do save, how do I achieve the greatest benefit? This is the decision that brings many a new investor undone as they neglect the most important element prior to any undertaking (especially into the investment world), that is they fail to plan. And if they do create a strategy, they stray from it.
The golden rules of investment:
No matter how large or small an investment you make, you need to begin with the end in mind.
You need to have a clear understanding of how long you have to invest your capital, what you need to achieve in the form of investment returns to reach your goal in the specified timeframe, and your tolerance to risk (potential loss of capital). These parameters will provide the boundaries and guidance to how you invest your capital.
For instance, for individuals close to retirement, the emphasis is generally on capital preservation. Whereas, for investors under 40, their needs are quite different as they have the time potentially to ride out the significantly wider range of ups and downs that come with investing in some asset classes (otherwise known as ‘volatility’).
Cash, the safest and simplest of the asset classes, involves providing your capital to a deposit taking institution for either a set timeframe/term (e.g. Term Deposits) or ‘At Call’ (readily accessible by you at anytime). And in return, you receive interest on your capital invested.
Generally, rates on offer for Term Deposit investments will be 2-3% greater than at call rates as the institution you have invested with has greater certainty over their own cash flow. Income is the only form of return with cash, there is no intrinsic capital value other than your funds originally invested.
Bonds, in essence, are a loan to either a government or corporate entity and again, you receive a regular interest payment, i.e. similar to a mortgage with the bank, except you are the lender.
Dependant on whether the bond is issued by a government (history has shown it can also depend which government) or a corporation, will determine the interest rate offered. At maturity, you also receive full repayment of your initial investment capital.
Property, now assuming there is only $5000 to invest, direct property would generally be out of the question as any lender would need a significant deposit to be available, however exposure to the property sector can still be obtained through using listed property, e.g. investing in stocks such as Westfield, Stockland, Mirvac etc, or perhaps through a managed fund which will pool your capital with other investors and maintain a portfolio of similar stocks, thereby providing greater diversification to reduce risk.
When investing in listed property, there are two forms of return to be received, distribution income (rental income received on the underlying investments, capital gains for any assets sold etc) however there is also a capital element as the value of the underlying stocks/properties will change, the value of your initially invested capital will appreciate or can depreciate (volatility).
Shares/Equities, while being the most volatile asset class, history shows the sector also provides the greatest potential return over the longer term (both domestic and international).
There are two forms of return achieved, dividend income (a return of profits the company has made for the period) and capital value appreciation/depreciation. An exposure to shares can consist of either direct stocks e.g. shares in BHP, CBA, etc or via a managed fund, it can also be obtain through the use of an Exchange Traded Fund, which provides a combination of the benefits of both i.e. increased diversification (usually index based, say ASX200 etc) while remaining listed on the exchange providing significantly increased liquidity.
Anthony Bell’s final word
As mentioned earlier, the key element is to begin with a specific strategy prepared to provide the guidance required to reduce the impact that the emotions created by investing will have on your decision making. It is always best to get sound advice from qualified professionals prior to undertaking such a move as it can make the difference between success and failure.
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