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.
Your Objectives
Are you investing for income, capital growth or a combination of the two? Your goals might include:
- saving for a deposit on a home
- saving for the education of your children
- building wealth of your retirement in 15 years time
Robert: Age 33
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."
Your Timeframe
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 |
Will you outlive your capital?
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
