Investment goals and risks

Investing is about putting your money to work to achieve your personal goals, so a great starting point it to identify what you want to achieve and by when.

Setting a timeframe for each goal helps you stay on track and will enable you to think about how much you can afford to invest and how long it will realistically take to reach your goal.

Questions you might want to consider before investing include:

• What do you want to achieve from your investments?
• Are you investing for a short, medium or long term?
• Do you want a return in the form of income or capital growth?
• What asset classes do you need to access in order build a diversified portfolio and achieve your required return?
• Are you prepared to risk some of your investment capital for the opportunity to make higher returns?

Your age and investment timeframe may affect your decisions. A full service broker can provide you with professional financial advice and help assess your current financial situation and set your financial goals.

You should seek your own professional advice on the appropriateness of investments to your circumstances. You should also consider seeking the advice of an investment adviser who holds an Australian financial services (AFS) licence or is a representative of an AFS licensee. Be sure to work with someone who understands your investment objectives and tolerance for risk. Your investment adviser should understand the products they are recommending, be able to explain whether or how they fit with your objectives, and be willing to monitor your investment alongside you. The Find a Broker page may assist you in locating a full service broker that can provide advice.

The investment products available through the ASX can assist investors in achieving their investment goals when used correctly. The strategy that is right for you will depend on your own personal circumstances and it is important to seek professional advice before deciding to invest.

The following strategies can be useful tools to help investors achieve specific outcomes, and you should take time to learn more about these and other strategies before deciding what is right for you.

Strategic Asset Allocation

Strategic asset allocation sets the proportion to be invested in each asset class in order to achieve your investment objective. If you are investing for a short period of time (1 - 3 years), then you may be willing to accept low levels of risk of losing your capital while achieving a lower return. This may mean taking a conservative approach by choosing asset classes and products that provide a relatively predicatable rate of return and allow you to access your money quickly when you need it. If you have a long-term (7+ years) investment timeframe then you may be looking to create a high growth portfolio that invests in relatively riskier asset classes (such as Australian and international shares), has higher levels of volatility (periods where the capital value goes up and down) and provides higher expected rates of return versus other asset classes.

Core-Satellite

The core-satellite approach to portfolio construction uses index tracking investments, such as ETFs, as the stable ‘core’ of the portfolio with carefully selected lowly correlated active investments, such as managed funds (mFunds), as the ‘satellites.’ The advantages are that a sizeable portion of the portfolio is invested in the lower cost ETFs whilst the portfolio also benefits from the alpha that can be obtained from exposure to active, professionally-invested managed funds. This approach helps investors achieve diversification across asset classes and investment strategies while helping to reduce total investment management fees.

Dollar-Cost Averaging

Dollar-cost averaging involves investing the same amount of money into an investment product at regular intervals over a long time period – whether market prices are up or down. For example, if investing into shares, more shares are purchased if prices are lower and fewer are purchased when prices are higher. This helps average the purchase prices over the total period that an investor keeps investing. This investing discipline helps investors avoid emotional buying decisions when prices are higher or lower. Dollar cost averaging through a managed fund or ETF enables you to gain a broad investment exposure with each investment.

Reinvesting Distributions and Dividends

Most managed funds and ETFs allow you to reinvest distributions back into the fund. Reinvesting distributions allows you to purchase more units and increase your investment in the fund. Whether you choose to reinvest your distributions  may depend on whether you bought the fund for capital growth or for income purposes. You may also choose to use your distributions to invest in a different fund or other assets in order to help diversify your portfolio.

Dividends or distributions reinvested are still treated as income and as such, are subject to tax.

Rebalancing

In establishing a portfolio, investors often start with a strategic asset allocation (see above). After a period of investment, you may find that your initial asset allocation has changed, for example into a higher growth allocation. This is because some asset classes may grow more strongly than others and some asset classes may fall in value. Rebalancing your allocation can be done with new cash flows or by selling down and reallocating a portion of your portfolio. However if you are selling down assets, be aware of the tax consequences and seek tax advice.

With all investment products it is important to read the product disclosure statement to gain an understanding about the structure, investment objectives, investment strategies, risks and costs of the product. You should do this before you make a decision to invest. You can find the product disclosure statement on the ASX website or the website of the product provider.