Diversification across asset classes, multiple sim cards and monogamy
Many people, particularly young people tend not to look much further than cash investments (bank accounts, term deposits, bonds and money stashed under the pillow). We thought we’d have a quick look at diversification and other forms of investments.
When we talk about diversification we’re talking multiple as in like, more than one. Monogamy is after all soooo 1995 and techniques incorporating the use of multiple sim cards and other readily available technology solutions has, after all, made keeping track of more than one relationship so much easier than it used to be. Open relationships are for many people the way it’s done now and to a certain extent it’s not a bad idea to think of your investments along the same lines – don’t let your money be afraid to see more than one partner. It’s 2012 after all!
You may have heard of managed funds before, but do you know what happens to your hard earned cash when you invest in one? Managed funds are often a good starting place for new investors. The money from under your pillow is pooled together with other investors’ money. Professional fund managers control your investment and the underlying funds where your money is essentially invested. Depending on the fund you may only require as little as $1,000 to get a foot in the door.
There are different types of managed funds available – some simply invest in a single sector fund alone (e.g. exposure to Australian shares only) where others may provide you with exposure to each investment class (International and Australian shares, property and infrastructure, cash and fixed interest). By combining your money with others you get exposure to a far greater number of diverse investments than you otherwise would – it’s like the financial equivalent of one big giant love in! Managed funds can also generate income distributions and with the power of compounding you may be pleasantly surprised how quickly your investment will grow!
Share portfolios are a direct way to invest in the market by purchasing part ownership in a company. Owning a share provides you with direct control over your investments. You effectively cut out the nightclub and drinks (fund manager) and go straight to hooking up with your investments in the most direct way possible. These investments can provide an ongoing income stream through the payment of dividends. If you reinvest the dividends it will have the effect of compounding (see The Power of Compounding on iGenWealth).
Exchange traded funds (ETF’s) are like a cross between the two and you invest by purchasing directly via the share market. However, be sure to understand exactly what you are buying into as ETF’s are structured in different ways.
Property is another form of investing which will (hopefully) generate regular rental income and appreciate in value over time. Investing in property is a more involved process in comparison to simply investing in managed funds and letting the professionals do all the hard work. Finding a loyal and hardworking property manager will take the burden off your shoulders by allowing them to manage it for you!
Gearing involves borrowing money to purchase investments which are expected to pay an income or increase in value over time. Gearing improves performance in a rising market and magnifies losses where markets are falling. Incorporation of gearing into an investment strategy can significantly increase the risk and is not for the faint hearted! You are not just investing your hard earned cash but the money that you have borrowed as well which needs to be paid back if it all goes wrong!
Regardless of where you decide to invest your hard earned it’s important that you give some thought to some guiding principles:
- Establish your risk profile and invest in a portfolio of assets which fits the level of risk you are happy to accept
- Understand what you are investing in, the characteristics of the asset class where your money is and the volatility that may go with it.
- Understand the length of the market cycle appropriate to the asset classes you choose to invest in and remember that sometimes you might have to stay in and ride out the low points…..There’s no point investing in an asset class which requires commitment if all you’re looking for is a one night stand…
So maybe, it’s actually OK to let your money sleep around a little bit….
Wealth information for the iGeneration!
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Very nice site!! Good job – keep it up.