Prime Time Financial Counsellors Pty Ltd: Mismatch Risk

There is no such thing as a "one size fits all" investment plan. As an investor you need to work out what mix of assets suits you at that time. What is a perfectly sound investment choice for you now may not be best for you at another time.

To work out the right fit you must minimise your risk by focusing on two critical factors - your objectives and your timeframe.

Are you investing for income, capital growth or a combination of the two? Your goals might include:

Having sold his house and paid out the mortgage, Robert had $60,000 left over to invest while he looked for the right place to buy "I wanted to achieve a high return, so I'd have more money to spend on my new place," he said.

"When I found a share trust that had earned 28% in the last 12 months, and averaged 20% a year over the past three years, I thought great - that's perfect!" What Robert didn't realise was that higher long term returns usually go hand in hand with volatility.

In his situation, the sharemarket represented a very risky investment choice. "Six months later I had found a house and was ready to withdraw my money, but the value of my investment had fallen quite a bit. Of course, I didn't have time to wait for it to recover. I needed the money right away, so I had to accept a $5,000 loss."

Sometimes you will want to invest for a short time only, maybe for a specific goal: at other times you might be able to take a long term view, aiming for growth of your capital. The following chart may help you choose the type of investment mix to best suit your goals.

Objective	Time Frame	Investment
Short term	Less than 12 months	Cash
Medium term	At Least 3 years	Emphasis on fixed interest with some cash and growth assets
Long term	More than 5 years	Emphasis on growth assets (shares and property) with some access to cash

There is also a "risk" of living too long. In other words, if you are using the capital of your investment to live on, you could outlive the value of your capital. It is a fact that people are living longer due to improved medical techniques. For this reason it is important that you have investments such as shares or property that give you capital growth and therefore continued income.

Reproduced with the kind permission of FPA and Macquarie Investment Management Limited