Are you ready to spread your investment wings and diversify beyond the basics?
If you’re a first-time or casual investor, the first things that come to mind when you think of investing are probably shares and property. But there’s so much more to explore.
If the idea of venturing into the maze of available investments makes you nervous, relax. Spreading your investments across a range of assets is actually an effective way to reduce your risk. This is known as diversification.
Noel Yeates, Senior Wealth Adviser with Macquarie Wealth Management talks us through some investments and assets you may not have considered before, and how you can access them.
Bonds are a fixed interest investment. In effect, you are lending your money to a government or a company for a fixed amount of time, and in return they will pay you interest.
It sounds simple when put like that, but it’s not. According to Noel, bonds can be more complicated than shares.
“Not all bonds are the same. They have different interest rates, timeframes, features, risk profiles and underlying security. Investors need to understand how that fits with their risk appetite and profile.”
Bonds range from lower risk (for example, Australian Government bonds) through to very risky. You are likely to earn higher interest on a riskier investment.
It is very difficult for an individual to manage the risk of bonds on their own, so Noel suggests “investing through an exchange traded fund or managed fund account, where the risk profile is managed for you” may be more appropriate if you aren’t experienced in bonds.
Not all bonds are the same. They have different interest rates, timeframes, features, risk profiles and underlying security. Investors need to understand how that fits with their risk appetite and profile.
Did you know that you can invest in infrastructure projects like roads, railways, airports – or even electricity transmission?
You can do this by investing in infrastructure 'entities' through companies that specialise in these types of projects, which are usually listed on the Australian Securities Exchange (ASX), or through specific managed funds. These are long-term investments that may take some time to generate cash flow.
As with all investments there are risks to be aware of, but Noel advises that the upside for infrastructure is that once the project is established “it will provide a reliable income stream and be a long-term asset. It has a high degree of security as valuations generally don’t change much.”
Options are contracts that give the buyer the option to buy or sell a particular asset at a specific price anytime before a specific future date.
Noel cautions that options are for professional investors only. “Even then, you should do a seminar or course first to understand what you’re investing in.”
“Some people trade options as a money-making venture, others use them to manage (or hedge) risk by reducing your exposure through shares. But they can be very risky and you need a reasonable amount of cash available to cover your position.”
You can access options directly or through a managed fund, or an exchange traded fund.
Managed funds open the door
You can access bonds, options, infrastructure and other less common assets by investing in a managed fund.
Managed funds are funds managed on your behalf by a professional investment manager. The ‘fund’ is money pooled together from a group of investors –which gives you access to overseas markets and wider opportunities that are likely to be out of reach of an individual investor. Without spending time individually picking stocks, you can diversify your portfolio across assets and markets and effectively spread your risk.
Noel says, “The good thing about a managed fund is that you are handing over your investment decisions to a fund manager. If you’re time poor or not that interested, a fund manager can be an appropriate way to go. But you still need to understand what you want from your investments and your level of risk appetite.”
Have a plan before you start
Whether you are a beginner or an experienced investor, before you branch out into these broader investment opportunities, Noel suggests “you need a clear strategy about what you want from your investment. Set targets for performance and then manage the risk to meet those targets.”