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Investment Fundamentals: What you need to know

July 1, 2016

Investment Performance

Whether you are a first-time investor, or have built a substantial investment portfolio over time, it is important to have an overall plan and regularly evaluate your investment strategy. When constructing your investment portfolio, it is very important to understand the fundamental principles of investing, as well as the different investment options available to you, so that you can ensure your investments are meeting their objectives.

Compounding

Compounding is often described as ‘earning interest on your interest’. In the case of an investment such as shares, the benefits of compounding can be profound. Each time a company pays a dividend, instead of receiving this dividend as a cash deposit, it can be reinvested to acquire additional shares. These additional shares then generate further earnings (dividends) that can be further reinvested, and the cycle continues.

For example – If you invested $10,000 into CBA shares on 1 July 2000, you would have purchased approximately 361 shares.  Without dividend reinvestment, the value of these shares today would be approximately $27,653.  With dividend reinvestments, today you would have approximately 833 shares with an estimated value of $63,808.*

The effects of compounding can have a significant impact on the value of your investment over time, however consideration must also be given to constructing a portfolio with a mix of both defensive and growth style investments.

Defensive Investments v Growth Investments

Defensive investments, such as cash and fixed interest aim to provide investors with regular income at relatively low risk. Investments such as property and shares are usually classified as growth investments. These aim to increase the value of the capital invested as well as providing income, with a higher risk of a possible fall in capital value. The exact mix of defensive vs growth investments will depend on your objectives, investment strategy and risk appetite.

Investment Risk & Diversification

All investments provide a certain level of return and are subject to a certain level of risk. As a general rule, the larger the potential investment return, the higher the investment risk and the longer you need to remain invested to reduce that risk.  The amount of risk involved with an investment can be managed by matching it appropriately with the length of time you have available to invest and your tolerance towards volatility or fluctuations in returns. It is therefore important to think long-term, and keep sight of your overall investment strategy.

Investors cannot control the performance of their investments, however investing in different asset classes and diversifying your investment portfolio, can provide some ‘smoothing’ of investment returns over time. The exact mix of investments you choose will depend on:

    • your financial objectives
    • the amount of time you have available to invest
    • your personal tolerance for risk. 

Diversification is important because every type of investment has its ups and downs. Owning a diverse range of investments can help you achieve smoother, more consistent investment returns.

Although these concepts are simple in theory, constructing a well-diversified investment portfolio, designed to meet your individual needs and objectives, is not so simple and requires considerable time and resources. If you would like to learn more about how we can assist you through this process, or to learn more about what investment options are available to you, such as managed investments via wrap accounts, direct Australian Shares, property funds and cash investments, please contact us to arrange a free, no-obligation meeting.

* This calculation has been included as an example only.

General advice warning:  The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.