Investing is unique to each person because of the time and money everyone is willing to invest is different. Before you begin investing you should think about what sort of investing style you would like to adopt, how much money you can afford to invest, and your risk tolerance.

Investing style

There are two main investing styles that you can adopt. The style you choose will depend on the time and effort you’re willing to put in, and the sort of output you expect from your investment.

Passive investing: This is a hands-off approach that tends to focus on long term returns. The return from these investments will be stable and predictable.

Active investing: This is a lot more hands on. It requires you choosing and conducting the investments yourself. This will require a lot more of your time because you will need to continually be researching opportunities. The return from these investments, although risky, can be quite large.

As a beginner, the passive style might be more appealing till you can learn and understand the market well enough to invest more actively.

Budget

It isn’t necessary to invest a large sum of money, it is necessary however, that you are financially prepared to invest the amount of money you choose. You should be able to set aside an ‘emergency’ fund, aside from the money you are prepared to invest. This is because there will always be some sort of risk involved in your investment and you should not rely on quickly selling your investments to fund an emergency.

Risk tolerance

The risk involved in an investment is usually proportional to the expected returns (higher returns = high risk; low returns = low risk). You need to find a balance of risks and returns that works for you and the amount of money you are willing to lose. This balance might take some time, and at the start, you might choose to only invest in low risk investments.

It is definitely intimidating to start your investing journey, but outlining how much time, effort and money you are willing to commit will put you in a good position to kick start it!

To discuss your investment journey please speak with one of our financial advisors to discuss your current situation and needs.  Contact us today. 

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What are some of the benefits of diversification?

The reason for diversification is simple: By including a variety of investments in your portfolio, your risk is less than if you put all your money in one type of investment.

Three key advantages include:

1. Minimising risk of loss

If one investment performs poorly over a certain period, other investments may perform better over that same period, reducing the potential losses of your investment portfolio from concentrating all your capital under one type of investment.

2. Preserving capital

Not all investors are in the accumulation phase of life; some who are close to retirement have goals oriented towards preservation of capital, and diversification can help protect your savings.

3. Generating returns

Sometimes investments don’t always perform as expected, by diversifying you’re not merely relying upon one source of income.

Choosing a mix of investments

What goes up usually comes down.

All securities behave differently from one another, going up and down in separate cycles and to varying degrees. An individual stock is affected by a combination of different elements, including the overall stock market, health of the industry the company does business in, and the company’s own performance. Though stocks generally vary more than fixed-income investments (such as bonds), fixed income prices can be affected by changes in interest rates and the overall fixed-income market.

Diversification within and across asset classes

Diversification can be achieved in many ways, for example:

• Across different asset classes including growth and defensive assets. Growth assets generally provide longer term capital gains, but typically have a higher level of risk e.g. shares or property. Defensive assets generally provide a lower return over the long term, but also generally a lower level of volatility and risk e.g. cash or fixed interest.
• Within asset classes such as purchasing shares across different industry sectors.
• Across different fund managers if investing in managed funds.

The risk or variability of different markets are impacted by: domestic/international developments and economic factors – such as production, employment, monetary policy, and levels of investment. How you diversify across asset classes, therefore, has a direct effect on the amount of risk, or variability of returns, you are likely to have.

For example, during periods of increased share market volatility, your share portfolio may suffer losses. If you also hold investments in other asset classes such as fixed interest or direct property that may perform better over the same period, the returns from these investments can help smooth the returns of your overall investment portfolio.

Practicing diversification in your savings plan

Mutual funds that invest in both stocks and fixed-income investments (balanced funds) offer one way of diversifying both across and within asset classes.

Another way of diversifying is to choose your own mix of investments, rather than invest in a fund where the mix is determined by someone else. However, if you take this route, you need to be more diligent about evaluating your choices and may want to get assistance from a professional adviser.

Two simple rules

When diversifying your investments, remember to:

1. Reduce “security-specific risk.”

Purchase a broad range of investments across various companies and industries rather than a limited selection of individual securities. This way, no single investment will dominate the performance of your retirement account.

2. Spread your money across different asset classes: stocks and fixed-income.

Each asset class has its own unique risk and return attributes. And because the risks of one asset may complement the risks of another, it may be possible to achieve higher investment earnings and reduce your portfolio’s volatility.

By diversifying your investments, you can achieve smoother, more consistent investment returns over the longer term, balancing out the ups and downs, protecting your savings from short-term losses and allowing them the opportunity to grow over time.

Need to chat to a financial advisor – Call LT today to discuss your needs.  (02) 4926 2300

Article Source: Russell Investments

Source: Russell Investments

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Concentration risk is the increase in investment risk that comes about from not sufficiently diversifying your portfolio. In other words, too much money is concentrated in too few assets, sectors or geographical markets.

This can happen:

• Intentionally, because you have a strong belief that a particular share or sector, such as resources, banks or property, is likely to outperform in the future.
• Unintentionally, through asset performance. One or two shares deliver spectacular gains, making the entire portfolio more sensitive to moves in just a couple of assets. Or maybe shares as a whole enjoy a period of strong growth. Even though you hold a large number of different shares, the increased exposure to one asset class increases the risk to your portfolio.
• Accidentally, through poor asset selection. Nine out of the ten top companies that make up the MSCI World Index also appear on the top ten list of the main US index, the S&P 500. Investing in two funds, one that tracks the world market and one that tracks the US market won’t deliver the level of diversification you might expect.

Managing your risk

The solution to concentration risk is our old friend, diversification.

• Appreciate the importance of asset allocation, the art of spreading your money across the main asset classes of shares, property, fixed interest and cash. Ensure your asset allocation matches your tolerance to investment risk.
• Diversify within each asset class. Holding the big four banks is not a diversified share portfolio. If property is your thing, buying four one-bedroom apartments in the same building, or even in the same area, creates a huge concentration risk.
• Rebalance your portfolio to keep it broadly in line with your ideal asset allocation. This may create a tax liability, but often it’s better to pay some tax than to carry too high a level of concentration risk.
• Understand each investment and its role in your portfolio. Does share fund A hold similar shares as share fund B? Do they both have the same strategy?
• Get a professional opinion. Even if you are confident in making your own investment decisions it’s wise to run them by a licensed adviser.

It’s surprisingly common for investors to develop an emotional attachment to particular shares or properties they own. Concentration risk can also increase over time due to lack of attention. Your financial planner will assess your portfolio for hidden concentration risk and help you achieve a better balance of investments.

For more information about managing your investments, contact our office on (02) 4926 2300 or email success@leenanetempleton.com.au

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When we invest in the share market we like to see our shares increase in value – obviously – but when the market isn’t performing well instead of joining everyone in the doom and gloom, don't forget about dividend income.

In Australia, unlike many other countries, we are fortunate that most of our companies pay an excellent rate of dividend. These usually include credits for tax paid by the company, referred to as “imputation” or “franking” credits. As an example of the benefit, if you deposit your money in one of our major banks’ online savings accounts you will probably receive an interest rate of around 3% per annum. And these rates will follow the movement of interest rates.

If you buy shares in that bank you are likely to receive a dividend in the region of 5-7% per annum. It is even better if the dividend is fully franked, as this would be equivalent to a pre-tax rate of 7-9% per annum. And when a market downturn causes share market prices to fall, most companies continue to pay a steady dividend.

Not all Australian shares are fully franked or have as high a yield as the example above. However, if you look at the average dividend yield for the All Ordinaries Index it is in the region of 4% with an average franking rate of 80%. This can give you a pre-tax return of some 5%.

The moral to this story is when planning your share portfolio don’t focus entirely on the growth aspect – remember the dividends.

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

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For some investors, the recent market volatility has resulted in anxiety and concern. In this article, we’ve outlined some of the common pitfalls that lead to harmful investment decisions and explain that the most important variable in your investing success – and the only thing you can control – is your behaviour.

Don’t be a Darth Vader driven by emotions

Darth Vader is the ultimate example of someone who started off on the right track, but motivated by emotion ended up on the dark side. Many of us have common emotional behaviours which can threaten our financial security. Fear, greed, indecision and regret are the emotions most frequently linked to harmful investment decisions.

In the case of planning for your future, there is at least one tendency that we’ve all succumbed to on occasion. It’s the feeling of instant gratification that causes people to overemphasise immediate rewards at the expense of long-term needs.

You may recognise your own past decisions in a handful of other frequent behavioural tendencies.

1. Overconfidence in your prowess as market prophets can also be detrimental to making market profits. When markets advance enough to get the casual investor’s attention, many often start to think their success is the result of skill, rather than cyclical luck.

2. Obi-wan Kenobi was smart in his advice to a young Luke Skywalker when he told him, “your eyes can deceive you, don’t trust them." Many investors have a tendency to overweight recent events. It causes misguided decisions at both good times and bad, as fear and greed override long-term prudence. It’s reactive, not proactive, and the response often causes people to buy high for greed’s sake and sell low out of fear.

3. Investors often also fear loss more than they seek gain. Loss aversion makes it difficult to put your money to work outside of a “safe” investment (eg term deposits), even if that perceived safety means inflation may destroy your purchasing power over time. Loss aversion causes people to plan for worst-case scenarios to minimise losses rather than trying to maximise wealth.

How to become a super Jedi and avoid dark side behaviour

1. Determine your risk tolerance.

Are you an aggressive investor? Or more conservative? Can you tolerate wide swings in the market, or are you willing to accept potentially lower returns for lower volatility?

Determining your risk tolerance is one of the first steps you should take in setting out your investment plan.

2. Stay diversified.

The very point of diversification is to limit downside losses in difficult markets. If a market correction happens (such as what we’ve seen recently) and you’re properly diversified, you’ll be less likely to lose a substantial amount – and thus less likely to sell at the bottom.

3. Think long-term.

Shmi Skywalker (Anakin’s mother) was on to something when she said, “you can't stop change any more than you can stop the suns from setting.” It’s good to remember that markets will always change and to realise that in the history of share markets, very few individual events have had a meaningful impact on long-term returns. Not the assassination of President Kennedy, not the fall of the Berlin Wall, not 9/11, not the start of the wars in Iraq and Afghanistan. In each of these cases, the US share market (S&P 500) stood higher two years after the event occurred.

Broadly speaking, in time, markets tend to recover from events that may seem overwhelming in the near-term.

4. Get advice. Find yourself a Yoda.

With bumpy markets, fear is a natural reaction. One of the best ways to deal with it is to seek advice from the specialists. Having a plan in place means you’ll be less likely to deviate from it – even when markets test our emotions with wild swings. Much like Yoda, your financial planner will help to guide you in the right direction. Call us now on 02 4926 2300.

Source: Russell

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Achieving any goal in life usually involves starting with a plan. Investing is no different. One of the most important things to understand before you embark on an investment plan is the relationship between risk and return.

Some investors focus only on maximising returns without considering the risk taken to achieve those returns. Others are so concerned about losing money that they seek to avoid risk altogether. Yet the single, most important lesson investors can learn is that risk and return cannot be separated.

Common risk profiles

There are many investments available with different levels of risk to cater for investors of different risk profiles. As the investment timeframe is naturally linked to life stage, risk profiles can be generalised across age groups (that is, the younger you are, the longer investment timeframe you have and the more aggressive you can be). There is no ‘one size fits all' approach to risk profiling among age groups.

There are a number of risk profiles, but for the sake of this article, we have outlined the three main profiles:

Conservative

Conservative investors are generally prepared to accept lower returns with lower levels of risk in order to preserve capital. Conservative portfolios tend to be allocated predominantly to defensive assets, such as cash and fixed interest, with the remainder in growth assets.

For this reason, people in retirement (in the wealth protection phase of their investment journey) may adopt a more conservative attitude to risk. They have less time to ride out the ups and downs of the share market and tend to have less of their portfolios allocated to shares and other high risk asset classes.

Balanced

Balanced investors generally have more of an equal mix of growth and defensive assets, and are comfortable with taking calculated risks to achieve good returns.

Growth

Growth investors are more comfortable with a higher level of risk in order to achieve potentially higher returns. Their prime objective is to accumulate assets over the medium to long-term and capital security is secondary to potential wealth accumulation.

Investors in this category can therefore expect to have around 85 per cent of their portfolio allocated to growth assets, although still diversified across shares, property and alternative assets.

Whichever risk profile you may fit into, the most important consideration when it comes to investing is that your investment plan needs to be tailored to your individual needs and goals.

Source: Macquarie

To learn more about how your risk profile will impact future savings, talk to your financial planner.
Call (02) 4926 2300 or email us. 

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The foundations of risk and return – Risk is integral to investing. This can be a frightening thought, but risk shouldn’t necessarily be feared, as without it there is less opportunity for reward. Quite simply, the higher the return you want from your investments over a particular period, the more short-term volatility (or risk) you have to accept in the value of your investments. Granted, if you’re happy to receive the bank deposit rate, you can put all your money in the bank, safe in the knowledge that the account balance will rise a small amount every day. But if you want higher returns, you’ll have to take on more risk and consider other investments, such as shares, fixed income, commodities and property.

Accepting short-term volatility for higher returns

Why do some investments offer higher returns than bank deposits? Each investment has different characteristics and offers varying potential levels of return. For example, a share’s return over a particular period is uncertain as the company’s profits are unpredictable, therefore share owners require a greater return than they would accept from bank deposits. What share investors are implicitly saying is “I want a higher return, but understand that I have to accept volatility in returns over the short term”.

Looking at risk from a longer-term perspective

Risk is the possibility or probability of loss. But if you’re talking about one of those frequent falls in a share price on a particular day, is that really an important loss? Firstly, it’s only a loss if you sell the investment. Secondly, most of the time these ’losses‘ are temporary and prices soon bounce back; this is the usual volatility of the stock market. The reason this is important is that the financial industry has defined an asset’s risk as the extent to which its price fluctuates; in other words, risk is the likelihood of an asset not achieving its long-term expected return over a short period.

Perhaps the risk that you should really care about is the possibility of an asset not achieving its expected return over the long term, rather than over the short term. In the case of equity share, such a situation might arise if the company in question goes out of business. So important risk relates to permanent loss of capital, not day-to-day losses of which the vast majority are temporary.

Instead of thinking of volatility as a risk (and therefore something to be concerned about), think of it as the cost of the longer-term return. And, if you’re able to ignore the fluctuations in the value of your investments from day-to-day and month-to-month, it’s a cost you won’t notice.

Diversification is a fundamental principle of investing

Avoiding permanent loss of capital requires careful analysis of the investment in question. But, if a company does go out of business, you can reduce the impact by having diversified your portfolio across a number of companies and even asset classes. 

For example, a simple multi-asset portfolio could include shares, government bonds, corporate bonds and cash. Given each asset class has its own expected return, they can be combined in different ways to target a particular return. If we assume that bank deposit rates are 0 per cent, the expected return from bonds is 5 per cent, and that from shares is 10 per cent; to aim for a return of 5 per cent, you can either invest the entire portfolio in bonds, or split the portfolio 50/50 between shares and bank deposits (or one of many other possible combinations).

Everyone will have a different attitude to risk and, therefore, the returns they require. By adjusting your combination of investments you can control the level of risk and affect your potential returns. This is known as asset allocation and is essential for effective portfolio management.

Source: Aberdeen-Asset

Call (02) 4926 2300 or email us here at

Leenane Templeton.

Speak to our financial planners to find out more about your investment options and the foundations of risk and return today.

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According to James Dunn of The Australian newspaper, whilst volatility has always existed in the sharemarket, it has never been as confronting to investors as it has been during the past two years. In fact, for much of the past three years Australian investors have lived with volatility well above levels previously considered normal.

This market’s downside has, according to investment advisor Jamie Nemtsas, caused many investors to reassess their reliance on the sharemarket and much of the money now held in term deposits, a doubling since September 2007 to $200 billion, has been from those fleeing the sharemarket, whether totally or partially.

Mark Thomas of van Eyk Research, whilst supporting active investment managers comments that a real return of 3% – 4% pa should be regarded as an attractive investment every day of the week, and this is what term deposits offer – with zero risk thanks to government guarantee. He states that whilst this is on offer it makes absolute sense to advocate term deposits as good investments.

Research house Zenith Investment Partners considers that globally, due to a more severe downturn, developed world governments will be heavy bond issuers as they attempt to borrow to fund the numerous fiscal packages they have initiated as responses to the global financial crisis. It indicates that the Australian Federal government issuance is expected to reach more than $300 billion by 2013, up from about $55 – $60 billion in 2008.

Historically, government securities have produced lower yields than corporate ones, so reduced income will be a factor for investors (and for Governments if increased aged pension funding is required).

It is important for investors to regularly reassess their appetite for risk and not just wait for market fluctuations. Volatility is not necessarily an ideal definition of risk, it is simply a measure of variance in the prices of a stock or returns from an index over a period of time. Whilst the active versus passive debate has focussed on equities, investors also need to consider their fixed interest portfolios. However Mohamed El-Erian of PIMCO considers the risks are high for passive bond investors and that the levels of government debt and currency investment risk demonstrate the importance of actively managed fixed income exposure. Perpetual’s Richard Brandweiner says that fixed income assets should provide certainty and predictability, but unfortunately. In the last two years many fixed income investments proved to be lacking in defensive characteristics.

By 2016 analysts indicate that 30% of our superannuation assets will be owned by people relying on those assets as their primary source of income. With retirees increasing and living longer there is a constant view that a high proportion of their assets should be in growth, however not everyone is convinced that holding a relatively high allocation in growth assets in retirement is a good plan. PIMCO’s John Wilson argues that people should hold their age in bonds, and others support this view indicating that the downside of investing in equities for people who are unable to sustain large drops in their wealth should invest in annuity products which provide a guaranteed income stream over a defined period of time. However, these products can be costly.

The importance of maintaining strategic asset allocations applies at all levels and as it can be difficult to understand the risks and the market conditions in which they perform well and those in which they don’t.

At the end of the day, everyone is an individual, people are different and have differing needs and objectives. Whilst there are mechanical ways of measurement in investments, there is nothing mechanical about investing or investors. There is no one-size fits-all. So the bottom line is to seek professional advice from your investment advisor. Andrew Frith at The Self-Managed Super Specialists is here to actively assist you make the best decisions for your needs.  

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