Whether you’re a beginner or experienced investor, choosing the right investment strategy is vital. This is easier said than done.
While plotting your investment path can and ought to be an exciting process, it’s often fraught with landmines and mis-steps, which is why director at Envision Financial, Luke Smith, cautions against taking on too much risk too quickly.
“If you are going to start an investment portfolio, it’s better to take a staggered approach rather than throwing all your spare cash at one thing in particular,” he says.
“A prudent approach at a time like now, when the word ‘recession’ is being thrown around, is to buy some stock and keep an eye on it. Monitor its reaction to the broader economy over the next six to 12 months. If the price comes off, then you might want to buy a little bit more and a little bit more.”
In his experience, those who get the most out of investing are careful not to over-leverage their finances to the point that paying for everyday expenses becomes tight. Whichever path you take, the likelihood is that you will want to maximise your return on investment.
Let’s take a closer look at what this term means.
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Defensive vs Growth Assets Explained
Defensive assets, such as bonds, are considered a safer class of investment, with less volatility. Other examples of defensive assets include cash and fixed interest deposits.
Examples of growth assets include shares, property and hedge funds, and they have the potential for higher investment returns, but generally speaking, carry much higher risk.
A diversified portfolio usually includes both defensive and growth assets, with the exact make-up dependent on the investor’s time-frame and risk-profile.
Related: How to Build Wealth in Australia
What Type Of Investment Offers the Highest Return?
It is difficult to determine which investment will provide the highest return, because there are so many variables.
“Traditionally speaking, anything in the growth side of the portfolio, such as Australian shares, property and international assets, will provide a greater rate of return than the defensive side of the portfolio,” says Smith.
That said, consider the sub-category of a particular asset. While commercial property tends to provide a higher return than residential property from an income perspective, a residential property in a high-value area could provide extraordinarily high returns.
“It’s difficult to say which investment is best, but if you’re getting 7% to 8% as a combination of income and growth on an annualised basis over time, that’s a reasonable rate of return without taking on crazy amounts of risk,” says Smith.
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What Is a Good Return On Investment?
In the current environment, a return of between 8% and 10% year-on-year is positive. If you take on more risk, the returns could be higher—but so too could the losses. Consider the longterm review, rather than looking at an asset’s performance across a six-month window, for a more sustainable approach to investing.
Popular Investments For Australians In 2023
Different types of investments offer varying returns and the broader market will affect even the lowest risk classes of investment. Below are some of the popular investment vehicles among Australians, but note this is intended as educational purposes only as past performance is not a reliable indicator of future performance.
Property
A large asset like property can help to build wealth ahead of retirement, and it is considered a relatively safe investment because property prices in Australia typically rise over time. While there are peaks and troughs, the long-term trajectory over the past few decades has been one of growth.
Property values can be significantly influenced by location and land size, more so than the building structure itself. However, property comes with carrying and acquisition costs, such as strata fees and stamp duty respectively.
“Like anything, you need to make sure you don’t go too hard and too fast,” says Smith. “The more you can save for a deposit and the more secure your cash flow, the better the opportunity you’ll have to maintain and then leverage into better quality assets as you get older. Fight the temptation to go out and buy the house of your dreams right out of the gates.”
In the current climate of high interest rates, households can come under pressure when they have borrowed substantial amounts for a mortgage. This can create mortgage stress.
Shares
A share involves an investor acquiring partial ownership of a company. The price of a single share of a company fluctuates over time in response to the market and the company’s performance.
One of the benefits of investing in shares is retaining greater liquidity— shares can easily be sold as needed.
“The same is not true of buying a property—you are either in or out,” says Smith. “It’s not like you can sell the kitchen if you need access to cash.”
There are also fewer expenses incurred for holding shares. After the brokerage is paid at the time of purchase, there are no additional ongoing costs.
“Shares are very cost-effective vehicles that provide good levels of diversification,” says Smith.
In his experience, many Australians consider shares a risky class of investment. However, it comes down to the particular shares in question rather than the asset class as a whole.
“I liken it to driving a car: you can make it as safe or as dangerous as you like,” says Smith. “You can drive slowly and abide by road rules, or you can speed and cut corners. It is important to make the distinction that a share is as risky as the underlying investment. There is a big difference in the level of risk in buying shares from the Commonwealth Bank versus a diamond mine in Uganda.”
Unlike property, you don’t need a lot of money to get started with investing in shares. By gradually purchasing more shares over time, you limit risk levels while allowing the compounding benefits to grow.
There is a big difference in the level of risk in buying shares from the Commonwealth Bank versus a diamond mine in Uganda
Bonds
Investing in bonds involves lending money to a company or government in return for what amounts to regular interest payments. These ‘coupon payments’ are often of a fixed amount.
Bonds are considered less risky than growth assets like shares and property, and are therefore known as a defensive asset.
“Bonds are not immune to risk,” says Smith. “We saw a lot of long-term bonds come under pressure last year because interest rates rose so quickly. Bond values fell because they have an inverse relationship between interest rates and their value. Again, you need to have diversification.
“Bonds are less volatile and thus provide more peace of mind, but always consider the quality of the issuer, the timeframe that they’re invested for and the underlying asset.”
Related: Bonds vs Stocks
Savings Accounts
Savings accounts, especially high interest ones, can form part of a diversified investment portfolio, but they do not generate high returns.
“I’d even go as far as to say that savings accounts are not an investment. It is just a holding account for cash on the way to another opportunity,” says Smith.
Cash rates have improved over the last 12 months because of higher interest rates, but the main benefit of savings accounts is the ease with which money can be accessed.
Alternative Investments
Alternative assets like crypto are highly volatile and Smith does not recommend investing a large percentage of an investment portfolio into them. Be wary and undertake thorough research. Scams are rife.
Peer to peer (p2p) lending is another alternative market gaining a lot of traction at the moment. It involves a private group of people lending to someone who may be ineligible to obtain traditional funding sources. The funding could be used to set up a home business in an industry that banks are unfamiliar with or something that is outside their usual area for investment. The risks associated with p2p lending are higher—as is the potential return which could be around 15%.
The advice and information provided by ForbesAdvisor is general in nature and is not intended to replace independent financial advice. ForbesAdvisor encourages readers to seek expert advice in relation to their own financial decisions and investments.
Frequently Asked Questions (FAQs)
What does ROI stand for?
ROI stands for ‘return on investment’ and it is a performance measure used to evaluate the profitability of an investment.
How can I calculate my return of investment?
The easiest way to calculate the return of investment is to subtract the initial cost of the investment from its final value and then divide that new number by the cost of the investment, says Luke Smith, a director at Envision Financial.
If it’s a property investment, subtract all the outgoings from rental income and maintenance costs. Divide that amount by the price you originally paid for the property. The resulting yield is a percentage rate of return on the investment.
“It’s worthwhile calculating the ROI on an annual basis so that you can analyse whether the investment is doing what you want it to do. That’s important because you’re always looking at other alternatives worth considering,” says Smith.
Is 10% a good investment return?
According to Luke Smith, a director at Envision Financial, 10% is an excellent return.
However, much depends on the kind of investment that generated the return. If a lot of risk was taken on and it only produced a 10% return, it could be somewhat disappointing. If a 10% return was generated out of a low risk savings account, it would be exceptionally good.
