BOOK PREVIEW: What are the different investment types?
When we think about different types of investments and what works best for our current situation, goals, and risk profile, we need to consider three main things:
Volatility – how much could the price of the asset vary?
Capital – how much will it cost you? What’s the initial outlay?
Liquidity – what happens if you need access to this money in a hurry? How quickly and easily can you convert the asset back into cold, hard cash?
With all that in mind, here are a few of the main types of investments.
Cash
We all know what cash is, whether it’s in your transaction account, a term deposit or in a savings account. It’s relatively secure and accessible, for quick access if needed. It’s relatively low risk, with low volatility, and provided you have it in the bank earning a teeny bit of interest, it will produce a regular (albeit very low) income.
The main trouble with cash is that your returns are loooooow, and any income you do make is taxable, so you’re automatically losing a percentage of whatever piddly interest you’re earning. Cash is a bit like one of those giant tortoises that live for a hundred years – they move super-slow, but they keep trudging forward, and their big shell makes them almost indestructible.
Property
I would class property as a medium-security asset. You can earn a regular income from rent and you can insure it against damage or loss. The main thing people find attractive about property is that it’s tangible. You can reach out and touch it – it’s real. Over the longer term, land prices grow in value, and you can leverage your equity to buy more properties or to renovate.
However, it is commonly known as an illiquid asset. As I’ve said before, you can’t simply slice off a room when you need a few thousand dollars, and there may be maintenance and upkeep that perhaps you didn’t expect. If you do decide to sell, there are advertising and agents’ fees to consider, and you really have no idea how much it’s worth until it’s sold.
And while, yes, you can make an income from rent, this is highly dependent upon demand. If the area or property type are not popular, you won’t be able to charge a premium price.
Property is such a diverse asset class in itself, I’d liken it to dogs – some are dependable, like golden retrievers; others are like yappy little chihuahuas. They talk a big game but fail to deliver when it comes to the crunch. Others again are like English bulldogs, and perhaps seem amazing at first glance, but may come with all these hidden issues that cost you loads of money and stress.
And just like choosing a dog, you need to choose the property type, location and strategy that’s right for you. You might even realise that dogs (or property) are not right for you at all, and you want another pet (or strategy) altogether.
Bonds and fixed interest assets
Fixed interest assets are relatively secure assets which offer consistent returns over a specified time period. This means you’ll receive regular income at set interest rates, and they won’t fluctuate like other asset classes. You’ll also get a higher return than you would on cash in the bank, without really flexing your risk-tolerating muscles too much.
A bond is a fixed interest asset that you can view as a loan made by an investor to a borrower, which is typically a corporate organisation or the government. You’ve probably heard of bonds before because they’re one of the asset classes that individual investors are fairly familiar with alongside shares, cash and property. I like to look at bonds as an IOU – but a more serious, legitimate one, not the kind written in primary school when your friend bought you a snack at the canteen!
Bonds are your slow and steady old horse, clip-clopping away at a reliable pace, unlikely to buck you off anytime soon. In return for lending your money, you receive coupon payments (basically regular interest payments) and then you get the face value of the bond back at the end of the specified term period if you’ve kept the bond the whole time (i.e. until ‘maturity’).
There are a few different options when investing in bonds and just like every other asset class, each option carries its own sets of
risks and potential return. The two main types of bonds you can invest in are:
Corporate bonds: these types of bond are usually part of a public offer, where a business issues an opportunity and individual investors are able to make a direct investment into that business.
Australian government bonds: corporate government securities or CGS are issued directly by the Australian government. These can be bought through your chosen trading platform or directly through the ASX. The value of an Australian government bond is fixed along with its interest rate, and payments are generally made to you every 3 to 6 months until the end of your bond term, when your initial investment is returned. Government bonds tend to be relatively lower risk than corporate ones.
The value of a bond can increase or even decrease over time before your bond term expires based on current interest rates. If you’ve invested in a bond with a floating freight, if interest rates drop, you will very likely see an increase in the value of your bonds, and if interest rates rise, the value of your bonds will usually drop. Whereas if you’ve opted for a fixed rate bond, its value won’t change.
Investing in bonds is as easy as investing in a share – you can invest directly, but you need to have quite a nest egg to get started (we’re talking six figures). However, you can invest in bond products via the ASX, for as little as one cent depending on which platform you choose! Another option is investing in the bond market through exchange traded funds (ETFs) or exchange traded bonds, which can be bought and sold on a stock exchange through an online trading platform or a broker. It’s worth noting that bonds and fixed interest assets are not liquid – you have no access to your money at all for the term of the bond.
Listed shares
Many people think shares are a high-risk game, but they are much less scary than a lot of people believe. They’re actually a medium-security asset, and shares in large companies are usually highly liquid which means you can sell some or all at any given time. If the company grows your capital also grows, you might earn an income if it’s a company that issues dividends to its shareholders, and you can check the value whenever you like.
However, shares may also be highly volatile, and you are at risk of having your investment go backwards if things turn sour. There’s also the information overload factor – so much jargon, so many numbers, and so many armchair experts giving you tips, it can feel like your head is going to explode! Some people see shares a bit like an exotic big cat – sleek, sexy, exciting, but unpredictable. You need to build up a strong relationship with them over time, and keep your eye on them so they don’t turn around and bite you when you least expect it!
What's the difference between shares and bonds?
Great question, so glad you asked! Besides the difference in liquidity – shares are relatively easier to access your money, whereas bonds are locked in for a period – with shares you’re an owner (part-owner of the company you’ve bought the shares in), and with bonds you’re a lender (you have loaned the government or company the money).
So, how do people actually make money in the stock market?
This is another question I field quite a lot and it’s certainly not a dumb one!
There are two key factors at play when it comes to making money on the stock market.
The first is to invest with regularity and consistency. How much you contribute isn’t nearly as important as how regularly you contribute.
The second factor is time. With enough time on your side, even small, regular contributions can result in huge gains down the track.
While many people view the share market as a terrifying, volatile beast, this is only true if you’re looking at shares on a day-to-day or month-to-month basis. When you take a step back and look at the bigger picture, taking into account growth over a 30-year period, you gain a different perspective.
If you’re looking to make a quick buck and you’re jumping in and out of different stocks? Sure, you’re vulnerable. If you’ve put all your eggs in one basket and only invested in one or two particular shares? Yes, even over the long term you run the risk of those shares stagnating or going backwards – which is why a diversified approach is so key. But if you have your money in a portfolio of quality investments, you contribute regularly, and you leave it invested for a longer period? That’s a different story.
Literally anyone can create wealth this way because, like I said, you don’t have to be funnelling thousands of dollars every month towards your investments. If you’re a single parent and only working part-time, $20 or $50 invested regularly and consistently can still provide a return over a long period.
You don’t need to start out with a huge wad of cash either. The key is spending less than you earn (i.e., avoiding debt) and investing over the longer term.
‘But Victoria, I still don’t get how people actually make money through the share market?’
This happens in two ways: through capital growth, and dividends.
Capital growth simply means the share price has increased over time. You buy shares at $1.10 each, and now they’re worth $1.50 each – that’s capital growth of 40c per share.
Dividends are your share of the earnings or retained profits the company has decided to share with its shareholders. You can keep these dividends as savings or reinvest them.
What I’m looking for personally when I’m investing is shares that have a higher dividend yield, which means they are improving over time. You can calculate the dividend yield of a particular company by dividing the annual dividend per share by the share price.
Now, I’m sorry to burst some bubbles here, but the best shares with the highest dividend yields are not your glitzy, glamorous or exciting companies that have huge amounts of capital growth, like Afterpay or Uber. The shares that everyone’s talking about around the water cooler that are going gangbusters over a short time aren’t your high dividend yield shares.
The shares that tend to consistently pay the highest dividends are those bog-standard, boring investments that your grandparents would feel comfortable with – blue chip stocks that plod along, growing slowly but consistently over the longer term, paying out regular dividends.
Figuring out the right mix of high capital growth and high dividend yield investments depends on your risk profile, life stage and goals. It also depends on your income and tax strategy, because you’ll only pay tax on capital growth when you sell your shares, whereas dividend yields will increase your taxable income (and the tax you’ll need to pay) for that financial year.
You may be looking for more regular dividend income, you may be wanting more capital growth – and this may change as your life circumstances evolve and you have kids, buy a house, or retire.
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Come join the team to celebrate the launch of Victoria’s second book, Investing with She’s on the Money!
After a tough few years of lockdown’s we’re SO excited that we’re finally able to get out on the road and boy do we have some fun surprises planned!
Come join Victoria and Jess as we celebrate the launch of Victoria’s second book, and just how far we’ve come on our journey as a community over the past two years. We wouldn’t miss the chance to bring together all of our favourite people (aka you) into one room to showcase some incredible surprise guests as well!
You can expect a live podcast recording, book signings and plenty of time to say hello, take pictures and celebrate all the incredible thing’s we’ve achieved as a community.
We can’t wait to see you there!