Basics of investing
20 March 2016
Choosing an investment strategy
Choosing appropriate investment strategies throughout your life can make a significant difference to the amount of super that you have in retirement. We believe that through education on the basics of investing you can gain the confidence and understanding required to help you take control of your financial future.
The basic building blocks of investment portfolios are the asset classes into which you invest. Each asset class has individual characteristics and carries a different level of risk and return to suit a range of investor types. Asset classes fall into two main groups – defensive and growth.
|Defensive asset class||Investment time frame||Risk|
|Cash constitutes investments in short-term money markets and securities. Cash investments can be used as a diversifier or mixer to provide security to volatile or aggressive portfolios, and can also provide a short-term investment solution.||Typical investment time frame of less than 12 months.||While cash is considered the 'safest' investment type, investors who invest their money predominantly in cash funds may run the risk over the long-term of nominal returns after the deduction of fees and taxes and the impact of inflation.|
|Bonds (fixed interest securities) are investments in the form of agreements to repay fixed amounts of money at pre-determined dates in the future. Bonds are generally used by governments, banks and corporations. Members can invest in Australian and international bonds – remembering that fluctuating exchange rates need to be factored into international bond investments.||Bonds typically provide investors with moderate investment returns over the longer term and provide a low-to-medium level of risk for investors||Bonds may be suited to investors seeking conservative investments over the longer term.|
|Growth asset class||Investment time frame||Risk|
|Property includes a number of different types of properties, such as residential, commercial, office, industrial, hotel and retail.||Property includes a number of different types of properties, such as residential, commercial, office, industrial, hotel and retail.||Property investments are suitable for long-term investors and can provide a higher level of growth without the level of volatility that occurs with share investments.|
|Shares (Australian and international) represent units of ownership in a company. Australian shares represent only two per cent of the world's stock markets. However, investing in Australian shares can provide investors with potential tax advantages known as dividend imputations. Investors need to factor in fluctuating exchange rates to international share investments.||Shares are considered riskier than all other asset classes. Although they tend to provide higher investment returns over the long-term, they do experience short-term volatility based on the fluctuations of the stock market and the underlying company's performance.||Shares are most suitable for long-term investment. Investors need to be prepared to experience moderate-to-extreme highs and lows in order to gain greater investment returns.|
In simple terms, diversification means 'don't put all of your eggs in one basket'. It means spreading your investments across different assets to balance your returns; if one asset class is performing poorly, another investment may be achieving better returns.
The three main ways of diversifying are:
- across different asset classes – this means investing in more than one main asset class
- within different asset classes – this means investing in a number of assets over a range of sectors in an asset class, such as resource or industrial shares and listed or unlisted property trusts
- across different styles of investment management– this means choosing a mix of fund managers who have different investment styles. This will reduce your exposure to one style of management or one type of investment. Individual investment managers have different strengths and weaknesses and perform better in different market conditions.
IOOF offers a range of pre-mixed investment options with diversification across all three areas, making them suitable for a range of investors.
Risk and return
What is risk?
Risk can take on many forms for investors. For example, there may be the risk that your investments will decrease in value, your capital will not grow at a greater rate of return than inflation or you will not reach your financial goals. Additionally, you may have to consider stock market risk, currency risk, interest rate risk, fund risk, company risk, etc.
The relationship between risk and return
There is a direct link between risk and return. Simply put, investors must be prepared to accept additional risk to achieve higher returns. Shares and property may offer higher returns than other asset classes in the long-term, but they will also provide the highest level of performance volatility. Generally, the higher the risk borne by the investor, the greater the potential for short-term capital value fluctuations.
How investment time frames influence your risk profile
When determining the level of risk that you are prepared to accept, it is important to factor in your investment time frame, ie how long you are planning to invest. Selecting investments that best match your time frame is another way to manage investment risk. Some investors with short investment time frames are concerned about protecting their capital and have very different needs to investors who want their investments to increase significantly over a long period of time.
Investor profile questionnaire
This questionnaire is intended to be used as a tool to help you identify some of the factors that may be relevant to you when choosing an investment option. Read each question and circle the response (score) that is most appropriate for you. When you have answered all of the questions, add up your score and refer to 'What type of investor are you?'
|You are aged|
|30 or under||8|
|31 to 40||6|
|41 to 50||4|
|51 to 60||2|
|61 to 70||1|
|In the past, you have|
|Invested in shares, property and managed fundsInvested in shares, property and managed funds||8|
|Invested in shares and/or property||6|
|Invested in managed funds||4|
|Saved money only in your bank account||2|
|If the value of your super fell, you would|
|Do nothing because you know that super is a long-term investment||8|
|Wait at least 12 months to see if the market improves||4|
|Wait a few months to see if the market improves||2|
|Switch your investments as soon as possible||0|
|Over the next five years, you expect your income to|
|Stay the same||2|
|You expect to retire in|
|More than 20 years||4|
|11 to 20 years||3|
|3 to 10 years||2|
|Under 3 years||1|
|Your attitude to investment risk is that|
|You understand investment volatility and would like significant exposure to high-growth investments||8|
|While you understand investment volatility, you would like to avoid significant exposure to high-growth investments||6|
|You have no interest in which investments you hold or you do not really understand investment risk||4|
|While you understand investment volatility, you would like a low exposure to high growth investments||2|
|You would like to protect your capital and do not want any exposure to high-growth investments||0|
Calculate your total score:
What type of investor are you?
|Total score||Investor type||Personal characteristics||Investment time frame||Likelihood of negative return||Asset allocation ranges|
|0 to 8||Conservative (very low risk)||Protecting your existing super benefit in the short-term is what is most important to you. You understand that this will mean less exposure to growth assets. It doesn't concern you greatly that this may result in a much lower return over the long-term.||Less than 2 years||1 in every 15 years|| Defensive 85 – 100% |
Growth 0 – 15%
|9 to 14||Moderately conservative (low risk)||You are interested in investing in growth assets but your main priority is to reduce the chance of a negative return in any year. You recognise that this may result in lower returns in the longer term than would be achieved in balanced or growth investment options.||At least 2 years||1 in every 8 years|| Defensive 50 – 70% |
Growth 30 – 50%
|15 to 20||Moderate/balanced (moderate risk)||You want a balance between receiving high returns and protecting the capital balance of your investment. You want your investments balanced between income assets and growth assets. You know that this may result in slightly lower long-term returns than a pure growth investment option, but it may also result in less likelihood of producing negative returns.||At least 5 years||1 in every 7 years|| Defensive 30 – 50% |
Growth 50 – 70%
|21 to 25||Moderately aggressive (high risk)||You are after reasonably solid growth over the long-term. You recognise that you may have negative returns from time to time but you want to have your assets largely invested in growth assets.||At least 7 years||1 in every 5 years|| Defensive 15 – 30% |
Growth 70 – 85%
|26+||Aggressive (very high risk)||You are prepared to accept significant fluctuations in your returns from year to year, but expect that over the longer term your investment will grow significantly. You realise that you might have negative returns in any given year.||At least 10 years||1 in every 4 years|| Defensive 0% |
Important note: The information in the above tables is provided as a guide only. The use of the questionnaire does not guarantee positive returns. It is intended to provide an indication of the types of portfolios available that may match a person's preferences in the circumstances described. As there may be factors particular to your situation, you may choose a different investment strategy or portfolio according to your specific needs. We recommend that you seek professional financial advice to assist you with choosing and reviewing your investment strategy.
How do I select my own portfolio?
Having now identified your investor profile, you can choose to select your own fund managers and investment options. IOOF offers a broad range of investment options through a number of fund managers, which provide you with the flexibility to develop your own investment mix. The table below outlines some investment mixes that may be suitable for each investor profile previously identified.
|Investor Type||Easy Choice|
|Conservative|| MultiMix Capital Stable Trust|
MultiMix Cash Enhanced Trust
|Moderately conservative|| MultiMix Conservative Trust|
MultiMix Diversified Fixed Interest Trust
|Moderate/balanced||MultiMix Moderate Trust|
|Moderately aggressive|| MultiMix Balanced Growth Trust|
MultiMix Growth Trust
|Aggressive|| MultiMix Australian Shares Trust|
MultiMix International Shares Trust
If you would rather outsource the construction of your investment portfolio, IOOF has multi-manager ready-made portfolios. These portfolios provide you with professionally managed investment options in which the asset and investment mix has been pre-selected. You may choose to match your investor type to one of these diversified options – the table above provides a suggested guide. If you have more confidence, expertise or access to advice, you may decide to construct an investment portfolio to suit your investor type by choosing your own managed funds, direct shares and term deposits from our extensive menu.
A Product Disclosure Statement (PDS) for each investment option is available from our website or by calling our client services team. Please ensure you read the relevant PDS before selectingan investment option.
Your investment profile may change over time, so it is important to review your investment strategy periodically. You may want to adjust your investments as you gain more investment experience or if your personal circumstances change. You can elect to change (switch) all or part of your investments into alternate options, or you can redirect your future cash flow, such as contributions, into an alternate investment.
To make an investment switch, simply download the Switching Instructions form from our website or call our client services team to request a form.
To view all of the investments offered, visit our website. We recommend you consult your licensed financial adviser prior to making any investment decisions.