If you have owned shares in a company and have decided to sell them, what are you planning to do with the funds that the sale generates? We trust that you plan to use them wisely and one of the ways that can be achieved is to speak to financial advisors to discuss ways of investing them. Investment planning is not something that should be done without thought, and presuming you want to keep safe what you earned from your shares, then investing needs careful consideration.
In discussing investment planning with your financial advisor one of the facts that should come to light fairly quickly is that you have choices as to what you can invest in. One choice is whether you invest in one type of asset or several. Our view and we hope the view of the financial advisors you speak to, is that diversity is far preferable. In other words, rather than investing in just one type of investment, you should spread your portfolio across several options.
This gives you important benefits that you would not see if you placed all your eggs in one basket, as it were. The first benefit is that it reduces risk. An example is investing everything into the property and the property market plummets, which many of us have seen more than once in our lifetimes. By diversifying, whilst your property investment value may drop, investments in other asset classes such as government bonds may have risen.
A second benefit of diversifying is that your investment value can be boosted even if some of your investments stall. For example, if you have everything ploughed into government bonds and the price of gold rockets, you have missed an opportunity to increase your investments’ value and your net wealth.
So, we have mentioned diversity a few times and thus it is time for us to highlight some investment opportunities that your financial advisors are likely to offer you, along with their relative risks and returns. Incidentally, these are just illustrations, and your actual return will depend on market conditions at the time so please do not regard these as guaranteed returns.
#1 Property: This can be an investment in commercial property or residential property. Returns come from rental income and the increase in property values.
Risk: Medium to high
Average Return Over Previous 10 Years: 6.3%
Time Frame For Return: Long term, 5 years +
#2 Cash: This is investing by simply leaving your cash in bank accounts such as long-term and savings accounts. Returns come from the interest the bank pays on your balance. This is classified as compound interest as it increases as your balance increases.
Risk: Virtually zero if an established bank is used.
Average Return Over Previous 10 Years: 3%
Time Frame For Return: Short term, 1 – 3 months although the biggest returns are made if the balance remains in accounts for longer.
#3 Shares: Investment in companies where you earn a share of the profits the company generates. Returns come from dividends and capital growth as the company’s value increase.
Risk: High
Average Return Over Previous 10 Years: 6.5%
Time Frame For Return: Long term, 5 years +
#4 Fixed Interest Investments: Covers several options such as capital notes, corporate bonds, government bonds and debentures. Speak to your financial advisor for specific details on each of these.
Risk: Very low
Average Return Over Previous 10 Years: Up to 4%
Time Frame For Return: Short to medium term of 1 to 3 years
#5 Alternative Investments: Again, you should speak to your financial advisors about these as there are numerous types. They include private equity funds, commodities (e.g. gold), and collectables (e.g. stamps).
Risk: Medium to very high
Average Return Over Previous 10 Years: Given their diversity, there is a wide range of returns.
Time Frame For Return: High risk could be months, medium risk at least 1 year.