Property, managed funds, trees, art, wine, CDO and Hedge Funds... Isn’t it wonderful to have such a vast array of choices? But how can you tell which ones are right for you at your stage of life, your tax rate, age or dependants
Strategic Asset Allocation
There are many exciting ways to invest your money but investing responsibly really comes down to three different categories. You can lend money and receive interest on that money, you can buy a property or you can buy a piece of a business. These three investment strategies are generally known as cash, property or shares.
The amount you choose to invest in any specific investment is known as your strategic asset allocation. But first, let's talk about cycles.
Investment markets move in cycles fluctuating from boom to bust and back again. Over 90% of your returns come from being in the right place at the right time, not from a specific investment.
For example, owning shares during 1999 – 2000 may well have produced strong returns. Owning property in most parts of Australia during 2000 – 2002 may also have resulted in strong returns with less importance on the specific property you owned.
It could have been in any street in almost any suburb because the property cycle was in motion. In 2003 – 2004 the share market was once again performing strongly. But history is no a guarantee to the future. Over the long term it is far more important that you are in the right place at the right time, than the specific investment alternative you choose.
The trick is, to predict exactly where the right place and exactly what the right time is! The simple answer is to diversify
Capital Growth versus Income
There are two reasons to invest, either for capital growth or to generate income. Generally we look for a mix of the two. The ratio that suits YOU depends on YOUR goals and objectives and that's the beauty of a Statement of Advice (SOA) (formerly known as a financial plan) from Cube.
It's personally designed for you to fit your particular situation. (Click here to find out more about the Wealth Cycle) To make the point simple, it's not likely that a younger investor in accumulation phase has the same strategic planning requirements to a retired investor who requires income from their investments.
Cash Investments
The most common form of cash investment is putting money in the bank. It's generally considered safe but the trade off can be relatively low performance. You can have it on call or on a term deposit. Generally, cash invested receives interest as income, but no capital gain. Bonds are the one exception to this where you can receive capital gain or loss related to the movement in interest rates.
Debentures
Lending cash to a company is called a Debenture. They’re similar to a term deposit in a bank, but are secured by a charge over the assets of the company. The interest rate and term of the debenture is fixed when the Debenture is issued.
Mortgage Backed Securities
Mortgage Backed Securities (MBS) are loans to people to buy real estate. These loans are usually arranged through an intermediary who pools investor's money and allows the investors to access a wider range of investments than they could with their own money. Mortgage Backed Securities vary greatly in quality and security. If you do invest in MBS, ensure that the portfolio is well diversified to avoid getting caught if one of the loans fails to perform.
Bonds
The bond market is widely used by professional investors and institutions to invest their cash. Bonds can be issued by governments, states or companies. Bonds pay a fixed interest rate set at the time of purchase and are valid for periods from 90 days through to 30 years.
The interesting thing about the bond market is that the value of the bonds moves in direct opposite to interest rates. Why? If interest rates go up and your bond is fixed at a lower rate, the value of the bond goes down and vice versa. In a falling interest rate environment bonds can be a good investment as the investor will receive some capital growth as well as a fixed interest rate.
Income from interest rates varies depending on your chosen investment. In the current interest rate environment (2005) interest rates vary from 5 - 7.5% for money on call. Higher interest rates of up to 15-20% are available in second mortgage type securities or rates of 10% for non-conforming loans.
These higher interest rates are often paid to attract investors prepared to take the higher risks involved. The old adage still applies; the higher the return, the bigger the risk – and if it looks too good to be true, it may well be!
Strategic Property Investments
When you invest in property, you buy a piece of real estate. The choice is yours, residential houses, units or a commercial property, but each will deliver a slightly different outcome in terms of capital growth, income and tax deductions. So make sure any purchase decision is congruent with the goals and objectives in your financial plan.
Property can achieve both capital growth and income from rent. When most people purchase a property they leverage their initial deposit by taking out a mortgage. If the property returns an income greater than the mortgage this is known as positively geared. If you have to contribute to the mortgage this is known as negatively geared.
Capital growth is expected in property over the longer term and capital loss is unusual, but not impossible. Remember when buying property, land appreciates over time and buildings depreciate (allowing depreciation deductions if appropriate on your tax.).
It is the increase in the value of the land that contributes to the growth in the value of property. Income from rental varies from area to area, however investors would need a high rental yield of around 10% to cover the mortgage costs at 7–8% leaving some cash to pay other expenses.
In central Sydney rental yields can be as low as 3–4% leaving the owner to contribute to the mortgage. This works as a strategy provided sufficient capital growth is achieved. You need to be mindful that property can be difficult to sell in a market that is falling away so it could take months or years to sell the property. Even in a good market it can take time to sell a property, making it essential to have sufficient cashflow and equity buffers in place to sustain any downturn in the market.
Active investors can get involved in renovating or developing property to increase its value. This is not for all investors as it requires a higher level of available cash and management, there is also a higher degree of risk involved. However returns can be very strong if managed correctly.
Share Investments
Buying shares is literally buying a share of the business and if the business is successful your share increases in value. The opposite is also true - businesses aim to grow from year to year and as their returns increase, so too does their share price as investors chase the potential of a well-run company. An investment in Australian equities or Australian securities may well have grown dramatically over the last 10–20 years, rewarding some share holders well.
However shares are a volatile asset category, because the market and the companies traded on it are open to a great variety of influences at any given time. Investors should seek education on the stock market or expert qualified advice before putting their capital at risk in the share market.
Shares build your wealth in two ways; through capital gain and through annual income derived from dividends. Dividends can range from zero up to a high of 7-8% of the share price or higher. A good dividend is usually considered to be around the level of bank interest rates. Equally attractive, if you own Australian companies, is that they may have franking credits attached (declared on your dividend statement) which can be claimed as a refund against your personal income tax.
It is possible to borrow and use the borrowed funds to buy shares, through simple investment loans secured against equity in your home or margin loans secured against the shares you own. One of the other benefits in owning shares is their liquidity. Should you need cash quickly, they may be sold almost immediately - and you need only sell as many shares as your situation requires.
Managed Funds and Superannuation
Want to live in comfort in retirement or just get by? A large part of your strategic Statement of Advice (formerly known as a financial plan) may be your superannuation, so don't treat it as a passive investment. Actively manage it to maximise its potential through participation in approved investment alternatives.
There are a lot of choices and to be frank, the logistics of managing your superannuation plan can be confusing to the uninitiated. When you work with your Cube adviser the financial products and services we recommended have been researched and evaluated with your specific requirements considered.
Also, although we resell other companies' products, we are not affiliated with any other financial organisation. That means we offer you an unbiased service.
Cube investment team regularly review the performance of mainstream and specialised funds to create a 'Cube Recommended' list of the preferred funds in each sector.
Your Cube adviser can assist you in the selection and assessment of a range of investment alternatives such as direct property or equities investment, superannuation, managed funds, listed trusts, term deposit and income funds, allocated annuities and master trusts.
Whether you are looking for a tax effective solution or a highly rated fund for the purpose of long-term growth or short-term leverage, a Cube financial adviser can help you find the best solution for your specific needs.
Self-managed Superannuation
When setting up a Self Managed Superannuation Fund (SMSF) it is required by Law (SIS Act) to have investment knowledge, a risk management plan and a comprehensive investment strategy. Which is where Cube can help with advice and recommendations that will keep you on top of your decisions and compliant with the SIS ACT.
Cube has customised packages available to help set up, manage and maintain your own self managed superannuation fund. Super doesn't need to be a jungle of paperwork and confusion with Cube to watch over you.
Alternative Investments
Derivatives cover a wide range of instruments that include options, warrants, futures and contracts for difference (CFD's). All Derivatives are contracts or agreements associated with an underlying security such as a share, an index (eg. ASX 200), a commodity (eg. coffee), an interest rate or an exchange rate. The derivative will fluctuate in value based on movement in the underlying security. Leverage is used in all derivatives where a small amount of money will control a large amount of assets.
That leverage means the capital gain can be large; however losses can also be large. The leverage amplifies returns in both directions. They're usually quite volatile on a daily basis and most investors are in and out quickly, trying more to generate an income rather than preserve the derivative as a long term hold.
The ways you can use them are very flexible, and it's this flexibility that makes derivatives attractive to investors, as its possible to make money if the underlying security goes up, goes down or stays where it is. Cube is licensed to help you with derivatives.
Margin Lending & Leverage Products
Margin lending allows investors to take advantage of investment opportunities, typically in shares and options, with funds provided through a margin loan. A margin loan allows the investor to borrow an amount of money against existing investments such as shares or managed funds.
Cube can help you review the suitability of margin lending for your investment needs and select the best provider for your individual situation. Basically it reduces the capital you need to boost investment returns.
With the support of our advisers, clients can work to offset the interest component of their loans via income generated from regular option trades.
Our experienced options advisers work with you from the beginning to assess your risk profile, assist in accessing funds, and planning a strategy around appropriate shares.
Whether you want to use a complicated options strategy or simply increase your available funds for trading, a Cube adviser can be your guide.
There is quite a choice. Visit us for professional advice.
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