Thursday, January 14, 2010

INVESTMENT RISK AND RETURN

Types of investment

Cash – bank deposits and cash management funds.

Fixed Interest – bank term deposits, finance company debentures, bonds and government stock.

Property – listed property trusts and commercial or residential property.

Shares – either in listed public company or in your own business.

Cash provides liquidity(easily access to it) and a small return. At times when investment markets are volatile or expected to underperform, it makes sense to hold more than usual.

Fixed Interest provides certainty of capital value and a regular income stream that can be compounded if necessary. An investment portfolio based largely on fixed interest investment will grow in value consistently but slowly. However it tend to be eroded over time by tax and inflation

Shares provide a small income stream dividend and the opportunity to make a capital gain over the long term. However they are volatile in value. The share market moves in cycles.

Business carries the potential to make good capital gain, but also the risk that your business may fail.

Property offers both a good income stream and the opportunity to make capital gain. The property market also moves in cycles, but less volatile compare to share market.


RISK and Return

Risk and return go together. Each of the asset classes has a different 'risk and return' profile.

Cash has the lowest risk and return.

Fixed interest has a higher risk than cash and a slightly higher return.

Property sits between fixed interest and shares.

Shares have the highest potential of return but the highest risk.

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