It’s important to spend less than we earn and put money away to provide for our needs in the future and to save for large purchases, like a holiday, car, or home. But a bank account may not be the best place for your savings. It’s great for emergency funds and savings for short-term financial goals, but you’ll reach your longer-term goals faster if you invest.

You work hard for your money, a good investment can get your money working hard for you.

When you invest, you expect to earn an income, but you may also benefit from a capital gain. This is an increase in the value of the investment over time. Capital gains increase the amount of money you’ll have to spend in the future, relative to what you have today.

Spreading your money out across different types of investments, known as diversification, actually helps spread your risk, because you’re not putting all your eggs in one basket, so to speak. If one investment performs badly or goes belly up, you won’t be at risk of wiping out your entire investment portfolio (a fancy term that refers to all the investments you hold).

Money in the bank may be safe and secure; but the interest you earn may barely keep pace with inflation, which means in real terms it’s not increasing in value at all. You’re likely to achieve your long-term goals faster if you choose an investment that has the potential for capital growth.

What is inflation?

Inflation is the amount goods and services increase over time, stated as a percentage. For example, if you go to the supermarket and purchase a basket of food for $102, that last year only cost you $100, then the cost has increased by 2%.

$2 / $100 = 2%

If inflation is running at 2%, on average, but you are only earning 2% interest on your savings, you have earned nothing in real terms. Even worse, if you had earned less than 2% on your savings, then in real terms, your money would buy you less, so you would have gone backwards!

Choosing investments that have the potential for higher returns, means you are likely to be able to buy more with your money in the future.

Make sure you’re ready to invest by checking you have:

• your debts under control
• enough cash for emergencies
• adequate insurance protection.

Debt

If you have a credit card, do you pay the balance in full each month? If not, pay this off before you consider investing. You are unlikely to earn more on your investment than what you are paying in credit card interest. The same goes for any other high-interest debt.

If you have a mortgage, are you comfortably making your repayments? Are you happy with how long it will take you to pay off? Increasing your repayments and/or payment frequency will create a buffer against any unforeseen circumstances in the future, save you interest, and have you debt-free sooner.

You don’t want to invest money you might need to live on.

Action:

• If you have any problems with debt, speak to a financial counsellor. You can find a list of financial counsellors in your area at www.ndh.org.au.
• Use the calculators at moneysmart.gov.au to work out a plan to eliminate any high-interest debt.

Emergency funds

Life doesn’t always go according to plan so it’s important to have cash savings you can draw on in an emergency. Emergency funds should be in a high-interest savings account or mortgage offset account. Investments can take time to cash out and you don’t want to have to cash out at the wrong time, like after a market downturn when you might lock in a loss.

A good rule of thumb is to have around 3-6 months’ worth of living expenses in accessible cash. An easy way to build these savings is to open a high-interest savings account and have some of your pay transferred directly into your savings account each pay.

To find a good rate of interest for your savings, use a comparison website to see what rates are being offered in the market. Don’t be afraid to switch to a new financial institution if yours is not offering competitive interest rates.

Action: If you don’t already have one, consider opening a savings account and automate regular deposits from your pay.

Insurance

Nobody ever expects to be in a car accident, lose their home in a fire or suffer a career-ending injury. Incidents like these can have serious financial consequences.

If you can’t afford to suffer a large financial loss, it makes sense to protect your home and other property. Protect what you have before you start trying to accumulate more through investing.

Full-time ADF members have statutory death and invalidity cover, which is also commonly offered through super. If you have more than one super fund, make sure you are not paying additional premiums for extra cover you don’t need or would not be able to claim on due to your employment.

Action: Go to csc.gov.au to find out about your personal insurance cover and read our insurance money guide for more information and tips on choosing insurance.

There is a wide variety of investments available to investors, but most of them fall into one of five common asset classes; cash, fixed income, bonds, property and shares.

Cash and fixed income are types of interest-bearing investments. They are also called ‘debt’ investments because you own the debt. You lend your money to a financial institution, government or company, and get interest (income) in return. You are the lender.

Cash

Cash investments include savings accounts and term deposits. They are suitable for holding emergency funds and money to meet short to medium-term goals, which are goals you hope to reach in the next 1-5 years.

Read the fine print when comparing accounts as there may be conditions attached, for example you must deposit a certain amount each month to be eligible for a bonus interest rate.

Pros:

• You are unlikely to suffer a loss as cash markets are not volatile like other investment markets.
• Money deposited with an authorised deposit-taking institution (ADI), such as a bank, building society or credit union, is covered by the government guarantee on deposits for up to $250,000 per person per ADI. You can find a list of ADIs at apra.gov.au.
• You will earn interest that will be periodically credited to your account. Interest left in the account will benefit from the effects of compounding. Most savings accounts pay interest monthly.
• Term deposit interest rates are locked in for the investment period.
• You can usually apply to open an account online.

Cons:

• When interest rates are low, returns may struggle to keep pace with inflation.
• It may take longer to reach your goals.

Fixed income

Fixed income investments include bonds, mortgage funds, capital notes and debentures. Interest rates can be fixed or variable (floating). These investments carry varying degrees of risk so you really need to know what the underlying investments are so that you can make your own assessment of the risks involved.

Pros:

• Including fixed income investments in a diversified investment portfolio may help smooth out the volatility of overall returns, which means overall you’ll have smaller highs and lows.
• Returns are usually higher than that of cash.

Cons:

• You may not be able to access your money easily if you need to get it early.
• Investment risk may vary from very safe (for products like government bonds), to very risky (for products such as unlisted debentures or unsecured notes). Read the Product Disclosure Statement (PDS) or product terms and conditions and make sure you understand how the investment works and the risks associated with it.

Bonds are an interest-bearing investment where you lend money to a government or company at an agreed interest rate, for a set period of time. In return, the borrower promises to pay you interest at regular intervals and repay your loan at the end of the term.

Bonds can pay interest at a fixed or variable (floating) rate. The bond’s prospectus will contain information on how and when interest will be calculated and paid. Interest is usually paid half-yearly or quarterly.

For more information go to moneysmart.gov.au and search for ‘bonds’.

Government bonds

The Australian Government issues bonds called Exchange-traded Treasury Bonds (eTBs) and Exchange-traded Treasury Indexed Bonds (eTIBs).

An eTB is a debt security (a bit like a term deposit) with a fixed face value (the amount you will get back at maturity) and a fixed rate of interest, payable every 6 months.

An eTIB has a face value (the amount you get back at maturity) that is adjusted for movements in the Consumer Price Index (CPI), so it can increase in line with inflation. Interest is paid quarterly at a fixed rate, on the adjusted face value. This means the amount of interest you receive will vary from one quarter to the next.

Pros:

• Comparatively low-risk investment.
• Provides a predictable cash flow, paid at set intervals, and a specified maturity date.
• Including bonds in a diversified investment portfolio may help smooth out the volatility of overall returns.
• They are listed (available for sale), and can be traded (bought and sold), on the Australian Securities Exchange (ASX).

Cons:

• Although they can be traded on the ASX, trading volumes are usually low, which means there are fewer buyers and sellers in the market for this type of investment, so you may have difficulty finding a buyer if you decide you no longer want your investment.

For more information on Australian Government bonds go to australiangovernmentbonds.gov.au.

State and territory governments may also issue bonds. Information can be found on each state and territory’s treasury website.

Corporate bonds

A corporate bond is one way a company can raise money from investors to finance business activities. It is not the same as a government bond, which is a low-risk investment. A corporate bond’s coupon payments (interest) may be backed by the bond issuer’s cash flow or the company’s physical assets. If it’s backed by a company’s cash flow it means the company is planning on paying you interest from the profits they make, and relying on their buyers to pay them on time so they can pay you. If the bond is backed by physical assets, the company is saying that they have assets they could sell if necessary, to be able to pay you.

A debenture is a type of corporate bond that must be secured against property. A debenture is always a fixed rate investment. For more information go to moneysmart.gov.au and search for ‘debentures’.

Most investors buy corporate bonds through a public offer, which is where a company issues a prospectus and investors apply directly to the company to buy the bonds. You can also buy and sell some corporate bonds on the ASX.

Pros:

• Less risky than shares issued by the same company. Read the prospectus thoroughly and make sure you understand the features and risks of the investment.
• Returns are usually higher than cash, bank term deposits or government bonds, but usually lower than shares.

Cons:

• Some types of corporate bonds like hybrid securities and subordinated notes are more complex and carry higher risks. They have complicated structures that can be hard for most people to understand.
• Low trading volumes may make them difficult to sell if you decide you no longer want your investment, because there may not be buyers in the market when you want to sell.

Buying a property to rent out is a popular form of long-term investment in Australia, but it’s not the only way to invest in this asset class. You can invest in a broader range of property assets through property schemes and Australian real estate investment trusts (A-REITs).

Investment property

If you are thinking of buying an investment property moneysmart.gov.au has a guide on where to buy and what to look for. Here are some of the basic pros and cons.

Pros:

• A property can provide a regular income. If income is greater than expenses, then the property is said to be positively geared.
• It may increase in value (capital gain) over time.
• Unlike other investments, such as shares and bonds, a property is a tangible asset. Even if the value of the property falls you can still live in it if you need a roof over your head.

Cons:

• The costs of owning an investment property, including mortgage interest, rates, maintenance, management fees and other ongoing expenses can be high.
• If rental income is less than costs, which is often the case, the investment will be running at a loss, and you will have to make up the shortfall, this is often referred to as negative gearing.
• There is no guarantee that a property will increase in value over time.
• Buying a property is a big financial investment, you’re putting a lot of eggs in one basket.
• Entry and exit costs are high.

Overseas property

Investing in overseas property is riskier than investing in property in Australia, especially if you don’t have local knowledge and you can’t regularly inspect the property. You’ll need to be familiar with local laws and taxes as well as Australian tax laws. Fluctuating exchange rates will also affect how much income you receive.

Property schemes and A-REITs

In a property scheme, you, and other investors, buy ‘units’ in a scheme that uses the pooled money to invest in a portfolio of property assets, that is, a range of different property assets. A professional investment manager operates the scheme, choosing which assets to buy and sell on your behalf. Assets may include commercial, retail, industrial or other properties. Property schemes are also known as a property funds, property syndicates or property trusts.

The investment manager is responsible for maintenance, administration, collecting rent and making improvements to the properties. Your money usually stays in the property scheme until it ends, when the properties are sold, and the net proceeds are distributed to investors.

Property schemes may be listed or unlisted.

• Listed property schemes, commonly referred to as property trusts or real estate investment trusts (REITs), are listed on a public market, such as the ASX. This makes them easier to value and easier to sell if you decide you no longer want the investment.
• Unlisted property schemes are not listed on a public market, so it can be harder to tell what the true value of your investment is at any given time and it can be difficult to get out of if you want to withdraw your money early. If you can withdraw your money early, you may have to meet strict conditions and pay a fee.

Income distributions are usually paid quarterly or half-yearly. Read the PDS carefully and make sure you understand all the fees you may be charged. For more information go to moneysmart.gov.au and search ’property schemes’.

You can find a list of Australian real estate investment trusts (A-REITs) at asx.com.au.

Investing in shares, also known as stocks, securities or equities, will make you part-owner of a business. If the business chooses to distribute profits to shareholders, you will receive the profits as dividends (income). Dividends often come with franking credits, which is a credit for the company tax that’s already been paid on the profits you receive. Franking credits will reduce the tax you pay on the dividend income.

Shares can be bought and sold on the share market using a broker or broking service. Broker’s fees vary, they can be flat-rate or percentage-based.

Do-it-yourself online broking services are usually the cheapest option if you don’t want expert advice. Most banks have their own online trading system that allows you to buy and sell shares and other types of listed investments through their website.

If you’re just starting out, you might want to stick with companies you are familiar with, that have businesses you understand, or you might choose to invest through an exchange-traded fund (ETF) or managed fund. You’ll still need to do your research and due diligence. For more tips on choosing shares to buy, go to moneysmart.gov.au and search ‘shares’.

Australian shares

Pros:

• Returns are usually higher than less risky assets, like cash and bonds, over the longer term.
• If the value of the shares increases over time you will make a capital gain when you sell.
• Most shares will pay you income in the form of dividends.
• Trading volumes are usually high, this means there are plenty of buyers and sellers in the market, making it easy to buy and sell.
• You can sell part of your investment if you need money quickly.
• Australian shares don’t have additional risks like international shares do and may have some tax advantages.

Cons:

• If the value of the shares decreases over time you will make a capital loss.
• Share values can be volatile in the short term.
• If you own shares in a company that fails, you may lose all of your investment.

International shares

International shares give you greater diversification by accessing larger markets outside Australia. The Australian share market has total market capitalisation of $1.9 trillion (as at January 2018), which is only around 1.7% of the world’s total share market value.

Source: World Federation of Exchanges, January 2018.

The Australian share market is heavily weighted toward the financial and mining sectors, which make up about 60% of the ASX200 index (that is, the largest 200 companies listed on the Australian Stock Exchange).

Investing in international shares allows you to invest in large companies and sectors that may not be available or well represented in the Australian market.

Like all overseas investments however, there are some additional risks:

• Currency risk – Foreign shares are held in the currency of the country of origin. Income and capital gains or losses must be converted into Australian dollars (AUD). The exchange rate between the foreign currency and the AUD at the time of conversion will determine how much you receive from the investment. Exchange rates fluctuate daily, exposing you to additional risk from the volatility of exchange rate movements.
• Political and regulatory risk – Laws and regulations in other countries may be different from ours. The way you buy, hold and sell shares may also differ. You will need to be aware of the foreign country’s investing laws and have a way to keep track of what’s happening in that market. The political climate in other countries can also be different from ours and may affect the way the foreign market operates.
• Time differences – Other markets operate in different time zones, so trades and information may be delayed.
• Tax – For taxation purposes, investment income from international investments is treated differently from income from domestic investments. If you hold international shares and receive income, consider getting professional tax advice.

You can invest in international shares through a broker or online broking service. You can also gain exposure to international markets more cost effectively through exchange traded funds (ETFs) or managed funds.

ETFs and managed funds

ETFs are a type of low-cost managed investment scheme that can be bought and sold on a stock market, such as the Australian Securities Exchange (ASX).

In Australia, ordinary ETFs are ‘passive’ investments, also known as index funds. This means the fund holds a portfolio of assets that mimic an index, such as the ASX200, and generally rises or falls in value in line with the index it is tracking. Index funds generate a return, before fees, that is almost the same as the index it is tracking.

ETFs can be bought and sold through a broker or online broking account. You can check if the ETF is fairly priced by comparing the offer price (if you’re buying) or the bid price (if you’re selling) quoted by a broker, with the latest net asset value (NAV) information available for the ETF.

If an investment is called an ‘active ETF’, the fund manager will buy and sell assets to try to outperform the market or index. The fees for these type of funds are usually higher, and historically, very few active fund managers have been able to consistently beat the market.

Risk is the chance an investment won’t give you the outcomes you expect. Your tolerance for risk is the amount of uncertainty you are prepared to accept to achieve the returns you want. How often are you are prepared to accept a negative investment return to achieve higher positive returns?

Your feelings about risk are shaped by factors such as your personality, upbringing, investing knowledge and past experiences. You may think you are a risk taker, but your behaviour might show you are risk averse, or vice versa. Some of us are naturally more cautious than others.

Research suggests that we feel losses more than we feel gains. For example, we would feel the loss of $100 more deeply than we would a gain of $100.

Your risk tolerance may also be affected by other factors, such as:

• Age – if you are younger, with time to recover from a setback, you may be more willing to accept higher risks for potentially higher returns. If you are nearing retirement, you may be more concerned with preserving your capital and therefore less willing to risk losing what you have.
• Timeframe – If you’re working towards a short-term goal (e.g. buying a house in 2 years), you will be more risk averse than if you are saving for the long term and have time to ride out fluctuations in the market.
• Loss impact – If a loss would have a significant impact your lifestyle, you may be more conservative with your investment choices. If, however, a loss would not make a big difference to your lifestyle then you may be willing to accept more risk.

It can be hard to accurately judge your own risk tolerance if you haven’t experienced a financial loss. This is because we think about how we would react to a given situation with a logical mind, but when that situation actually happens, we may respond emotionally.

Think about how you have reacted to other setbacks. If you tend to panic, or lose sleep, you may have a lower risk tolerance. If you are unemotional, and can adjust plans to suit new circumstances, then you may have a higher risk tolerance.

Action: Consider how much risk you are actually willing to take on as this may affect the types of investments or investment options that are suitable for you.

You’re more likely to choose the right investments if you start with a plan. Different types of investments are more suitable for achieving certain goals. The investments you choose will need to be appropriate for your;

• investment goal – what you are saving for
• timeframe – when you want to reach the goal
• current investments – is it different from other assets in your portfolio, helping you spread your risk across different assets classes
• risk tolerance – does it pass the ‘sleep at night’ test.

Goals and timeframe

Setting goals is about stating what you want, when you want it and how much it’s going to cost. For example:

• I want a $100,000 deposit to buy a house in five years, or
• I want to save $10,000 for a family holiday in two years.

Figure 2: Savings goal calculator, moneysmart.gov.au

Your goals need to be realistic and achievable. If achieving your goals means you need to save $200 a week but you can only afford to save $100, you’re setting yourself up to fail. You may need to adjust your goal, the timeframe, or both.

For longer-term goals, you may need to adjust for inflation. For example, something that costs $10,000 today, may cost $11,000 in 5 years’ time.

Action: Try to set at least one short (1-3 years), medium (3-7 years) and long-term (7+ years) goal.

Diversification

Diversification is about managing the risk/reward trade-off by selecting a mix of investments to help you achieve more consistent returns over time. Another benefit of not putting all your eggs in one basket is that if one investment performs badly or goes belly up, you won’t be at risk of wiping out your entire portfolio.

Assets that carry a higher risk should deliver a higher reward but are likely to have more volatile returns over the short term. You can offset some of this risk and volatility by including assets in your portfolio that have lower risk and return, but lower short-term volatility.

As well as diversifying across asset classes, you should consider diversifying within asset classes. For example, a diversified share portfolio may include shares of companies in different industries such as mining, banking, consumer goods and healthcare.

The following graph is an example of investment returns over a 10-year period. The balanced option represents a mix of asset classes, with 70% shares and property. It has less volatility than shares and property but a better overall return than cash and bonds.

Things don’t always go according to plan but, if you have diversified your investments and limited your exposure to any single asset, you will be less likely to suffer large losses.

Risk tolerance

Your risk tolerance reflects your ability to cope with dips in the value of your investments. Any investment you make should pass the ‘sleep at night’ test; if the risk worries you to the point of not being able to sleep, the investment is not for you.

Choose investments you are comfortable with, even if this means you need to adjust your goals or the time it will take to achieve them.

Selecting an appropriate asset mix

No matter what type of investor you are, sometimes other factors will determine the sort of investments that are appropriate. For example, you may identify as a mid-risk investor, willing to take on calculated risks for higher returns, but if your investment timeframe is 2 years, then cash is the appropriate investment choice, see Table 1.

Table 1: Examples of asset mixes based on risk tolerance and goal timeframe.

Fees & Costs

Be mindful of costs such as transaction fees. For example, if you wanted to invest in direct shares but had only saved $1,000, a $20 broking fee is 2% of your capital. If you waited until you had $5,000 to invest, a $20 broking fee would only be 0.4% of your capital.

Up-front fees and transaction costs should be considered when developing your investing plan.

Action: Develop a plan for achieving each goal you have set and identify the types of investments that are appropriate given your goal timeframe, risk tolerance and personal investment preferences.

After setting your investment goals, considered how much risk you are willing to accept, and developed a plan, the next step is to choose appropriate investments.

Funds, schemes and trusts

You can invest in individual assets, or you can gain exposure to a broad range of assets through a managed investment scheme. In a managed investment scheme, your money is pooled with that of other investors and used to buy assets. An investment manager then chooses which assets to buy and sell on your behalf.

Pay attention to the fees of each type of investment as fees reduce your net returns.

Choose an investment with features that suit for investment plan. For example, a managed fund may be more expensive than an ETF but allow regular contributions at no cost. If you want to be able to add to the fund regularly, a managed fund might work better for you. If you only intend to increase your investment once a year when you receive a windfall, such as a bonus or tax refund, then an ETF may be more cost effective.

Funds may be actively or passively managed, single sector or multi sector, listed or unlisted.

Active or passive

In an actively-managed fund, the fund manager buys and sells investments regularly in an effort to outperform a specific market index, such as the ASX200. Most fund managers cannot consistently outperform the market, and typically the fees on an actively-managed fund are much higher.

A passively-managed fund (also called an index fund), holds a portfolio of assets that mimic an index, such as the All Ordinaries Index or the S&P200 index. Index funds generate a return, before fees, that is almost the same as the index it is tracking.

Single or multi sector

Single asset funds focus on a single asset class, such as shares or bonds. Multi-sector funds contain a mix of assets and are often labelled according to the overall level of risk, such as a balanced or growth fund.

Listed or unlisted

Most managed funds are unlisted investments, purchased by applying directly to the fund. Listed investments, such as exchange-traded funds (ETFs), Australian real estate investment trusts (A-REITs), listed investment companies (LICs) and listed investment trusts (LITs), can be bought and sold on an exchange, such as the ASX.

How to decipher multi-sector portfolio labels

Managed type investments where you select from a range of pre-mixed investment options, often have labels such as ‘cash’, ‘conservative’, ‘balanced’, ‘growth’ and ‘high growth’, but what do they mean? The labels can differ from fund to fund, as can the investment mix, however the following examples will give you an idea of what the labels mean.

Table 2: Examples of pre-mixed investment options, the types of assets they typically contain and what to expect from the investment.

Cash Income Growth	Conservative Income Growth	Balanced Income Growth	Growth Income Growth	High growth Income Growth
Mix of investments 100% in deposits with Australian deposit-taking institutions	Mix of investmentsAround 30% in shares and property and 70% in cash or fixed income	Mix of investments Around 70% in shares and property and 30% in cash or fixed income	Mix of investments Around 85% in shares and property and 15% in cash or fixed income	Mix of investments 100% in shares and property
Expected return 2.7% Usually tied to the current cash rate	Expected return 3.8%	Expected return 4.4%	Expected return 5.0%	Expected return 5.3%
Volatility Very low	Volatility Low	Volatility Medium	Volatility High	Volatility Very high
Expect a loss 0 years in 20	Expect a loss 2 years in 20	Expect a loss 4 years in 20	Expect a loss 4-5 years in 20	Expect a loss 5 years in 20
Value of investing $10,000 after 5 years $11,400	Value of investing $10,000 after 5 years $12,100	Value of investing $10,000 after 5 years $12,500	Value of investing $10,000 after 5 years $12,800	Value of investing $10,000 after 5 years $13,000
Suitable for: Short-term goals Emergency cash Low risk tolerance	Suitable for: Short-term goals Low-mid risk tolerance	Suitable for: Medium-term goals Mid risk tolerance	Suitable for: Long-term goals Mid-high risk tolerance	Suitable for: Long-term goals High risk tolerance

Managed funds

Managed funds offer diversification and access to a broad range of assets or markets with a relatively small initial investment. A managed fund may allow you to make regular contributions to the fund, which means you can invest as you save.

Fees may be higher than other managed investment schemes, like ETFs, and you may not be able to cash it out when you want to.

Managed funds mainly focus on Australian shares, global shares, cash and fixed interest or multi-sector (a mix of different asset classes). Sometimes the name of the fund will not accurately describe, or be indicative of, the underlying assets of the fund, so it’s important to read the PDS to understand exactly what you’re investing in.

For more information go to moneysmart.gov.au.

Exchange traded funds (ETFs)

ETFs are a type of low-cost managed investment scheme that can be bought and sold on a securities exchange market. In Australia, ordinary ETFs are ‘passive’ investments that track an asset or market index, such as the ASX200. They generally rise or fall in value in line with the index they are tracking.

ETFs can be bought and sold through a broker or online broking account. You can check if the ETF is fairly priced by comparing the offer price (if you’re buying) or the bid price (if you’re selling) quoted by a broker, with the latest net asset value (NAV) information available for the ETF.

If an investment is called an ‘active ETF’, the fund manager buys and sells assets to try to outperform the market or index.

For more information go to moneysmart.gov.au.

Listed investment companies (LICs) and listed investment trusts (LITs)

LICs and LITs are a way of getting exposure to a broader range of assets in a single transaction. They can be bought and sold on the ASX, through a broker or online trading account, just like ordinary shares.

Listed investment companies (LICs)

An LIC is a type of investment, incorporated as a company and listed on a stock exchange. Many LICs operate in a similar way to a managed fund. They have an external or internal manager who is responsible for selecting and managing the company’s investments. You’ll need to try to assess the expertise and experience of the investment manager before you invest.

LICs are ‘closed-ended’ which means they usually don’t issue new shares or cancel existing shares as investors join and leave. This allows the manager to focus on selecting investments without having to worry about cash flow. If you want to exit, you must sell your shares on the relevant stock exchange; you cannot redeem the investment. LICs are companies, so dividends paid to you may have franking credits attached. These are credits for company tax already paid on the dividend income and will reduce your tax payable.

Listed investment trusts (LITs)

LITs are also closed-ended funds; however, they are incorporated as trusts, rather than companies. This means that any surplus income must be paid to you as a trust distribution. You will receive distributions in the same way the trust receives the income from the underlying investments. Franking levels may vary depending on the income distributed from the underlying assets.

Opening an online trading account

If you want to buy and sell investments online yourself, you’ll need to open an online trading account. This is very similar to opening a bank account. Many larger banks have online trading facilities. They may be called something like online share trading, online investing or online broking. If you are already a customer, you’ll be able to open an account online, some may even integrate with your online banking facilities.

If your financial institution doesn’t offer an online trading account, there are plenty of other online providers. Enter ‘online broking service’ into your internet browser’s search function and you should find online broking providers as well as comparison websites to help you choose a service.

Once you’ve found a service that suits your needs, follow the instructions to open a trading account.

A good online broking service will also offer you education, market insights, expert opinion as well as a host of other features to make your online trading experience easier.

Superannuation

If you are saving for retirement, super is a great option. Super is a tax structure where you can save for retirement in a tax effective environment. It’s tax effective because contributions and investment returns are taxed at a low rate.

Your employer contributions and any salary sacrificed (pre-tax contributions from your pay) are known as concessional super contributions, because no tax has been paid on them before they are received by your super fund. Concessional contributions are taxed at 15% when they are received by your fund. This is a lot lower than the average marginal tax rate, which means you’re already ahead.

For example, Jason earns $100,000 pa so his marginal tax rate is 37% + 2% Medicare levy. Full-time ADF members do not pay the Medicare levy, in which case the amount available to invest outside super, after tax would be $6,300.

TABLE 3: JASON’S COMPARISON OF SALARY SACRIFICING $10,000 PA INTO SUPER VS INVESTING WITH AFTER TAX INCOME:

Most funds have a range of investment options to suit your personal preferences and there are plenty of low-cost options available. You won’t be able to access your money until you meet a condition of release, but that shouldn’t be a problem if retirement is your goal.

Investment bonds

Investment bonds (also known as insurance bonds) are investments offered by insurance companies and friendly societies that can be a tax effective way to invest for the long-term if certain rules are followed.

All earnings in an investment bond are taxed at the corporate tax rate of 30%. If no withdrawals are made in the first 10 years of holding the bond, no further tax is payable, so they can be tax effective for investors with a marginal tax rate higher than 30%. Go to the ATO website to find out what your marginal tax rate is.

Contributions can be made to investment bonds, however there are limits on the amount you can contribute and still receive beneficial tax treatment. For more information go to moneysmart.gov.au.

Action: You should now be ready to put you plan into place. Open any necessary accounts, complete appropriate application forms, purchase assets and automate regular savings.

You may wish to seek professional advice to develop and implement an investment plan. A licensed financial adviser can discuss your situation in detail and recommend strategies and financial products to suit your needs.

Choose an appropriately qualified adviser rather than seeking advice from family members, friends or colleagues. Advisers who are members of a professional association are subject to member standards, operating guidelines and disciplinary procedures.

For more information on how financial advice may help you:

• Read the ‘Your money guide’ ‘Getting financial advice’.
• Watch the video ‘Financial advisers: The facts and the fiction’.
• Consider the Financial advice referral program.

While it’s not a great idea to swap your investments around frequently, paying extra fees as you go, you also don’t want to be tempted to set and forget your investments. Plans change, and investments don’t always perform as expected. How often you’ll need to review your portfolio will depend on the type of assets you own. If you own individual shares, for example, you’ll need to monitor them far more closely than an ETF, where the fund manager monitors your investment for you.

Market and economic conditions can change rapidly but responding with a knee-jerk reaction can often make things worse. Sharp movements in investment markets should be viewed in line with your long-term investment goals.

For example, if you own shares and the market suffers a downturn, the value of your investment will fall. But remember, that this is expected to happen every few years, and you are compensated for poor years with better than average returns in other years. Don’t sell an asset after the market has dropped, locking in a loss, if your asset has simply moved in line with the rest of the market, and it’s still a good asset that fits with your long-term investment strategy.

Cash and fixed income

Make sure you receive the interest you expect. If you have invested in bonds, make sure you receive the coupon payments when they are due.

Property

Keep an eye on the condition of the property, as well as the income you earn from it. If you use a property manager, they should inspect the property regularly, typically every 3 or 6 months. Even good tenants can go bad, so pay attention to the condition of the property. Repairs and maintenance should be dealt with promptly to maintain the value of your asset.

Monitor rental income closely to make sure your tenants are up to date with their rent and that your agent is managing the property in line with your management contract.

You might also want to keep up to date with what’s happening in the local area. Are there new developments in the area? How is it growing and changing?

Shares

If you own direct shares, you’ll need to monitor them closely than you would a share fund. That’s because you are making the decisions on what to buy and sell, instead of a professional investment manager. Read any market announcements, published financial statements, expert commentary, and other information related to the companies you have invested in. You should be concerned if a share you hold does not move in line with the market. For example, if the market rises but the value of your shares fall. Investigate whether this is a temporary glitch or something more serious. Try to work out if the issue is something you should ride out or if it’s time to cut your losses and sell.

Sometimes share values may move ahead of the market, often because they are suddenly very popular. If a share is outperforming, look for reasons why, such as strong revenue growth. Knowing when to hold a good investment, and when to take your profits and look for something new, is a skill that may take time to develop.

Managed investments

Managed funds, ETFs, LICs and similar investments should require less attention as you are paying fees to a fund manager to keep an eye on things for you. But that doesn’t mean you don’t need to keep an eye on the fund manager.

Check your investment at least every six months and make sure fees and returns are in line with what you expected. If returns are low, determine whether this is because a market you are invested in has performed poorly or whether the investment manager is not doing a good job. Compare your returns with similar funds as a benchmark for fees and performance.

Action: Set yourself reminders to review each investment.

Your financial goals may change over time. Your circumstances may have changed, or you may just have different priorities than when you first developed your investing plan. A good investment plan is fluid and can be adjusted to meet your changing needs.

Your investment plan will also change as you achieve certain goals and set new ones. If your investments don’t suit your current plan, adjust your investment mix to get back on track.

Rebalancing your asset mix

You may need to rebalance your asset mix from time to time. As investment values change, so will the percentage of funds that are allocated to each asset class. For example, if the share market has had a good run, the proportion of your investment funds allocated to shares may be too high for your risk profile, so you may decide to sell some shares and invest the money in a different asset class, to reduce your exposure to risk.

Consider reviewing your asset mix at least once or twice a year, so that your investments don’t drift too far from your original plan and your attitude to risk. Rebalancing can lead to better long-term returns.

Here’s an example of how to rebalance your investment portfolio.

Action: Review your goals, investment plan and rebalance asset mix if necessary.

Investment scams cost Australians millions of dollars each year. They are often so professional, slick and believable that it can be hard to tell them apart from genuine investment opportunities.

You might be introduced to an investment scam through a phone call, email or social media. It may even be an offer from someone you trust or who is introduced to you by someone you know. There are three main types of investment scams:

• investments that are completely fake and don’t exist.
• investments that do exist, but the scammer does not put your money in that investment.
• the scammer says they represent a well-known investment company – but they are lying.

In all investment scams, the money you ‘invest’ goes straight into the scammer’s bank account and not towards any real investment.

Warning signs of investment scams

If it seems too good to be true, it probably is! Scammers have become very sophisticated, often creating fake websites and glossy brochures that look legitimate, to back up the scam. The investment offer may be a scam if the person:

• does not have an Australian financial services (AFS) licence or says they don’t need one
• rings you repeatedly and tries to keep you on the phone, or emails you a lot to keep you engaged
• says you need to make a quick decision or you’ll miss out on the deal
• claims to be a professional broker or portfolio manager and sounds professional, but does not have an AFS licence, or is not an authorised representative of an AFS licence holder
• uses a name or claims to be associated with a reputable organisation to gain credibility, like NASDAQ or Bloomberg
• offers you a glossy prospectus or brochure, but their prospectus is not registered with ASIC.

Tactics used by investment scammers

Scammers may use a range of tactics to trick you into investing in their company. Some of the common strategies include:

Directing you to a fake website

Scammers may use highly sophisticated websites and issue online press releases that make false claims of outstanding corporate performance. Once they have your money, they may provide you with logins to view fake investment balances and growing returns.

Stopping you pulling out of the deal

If you try to pull out of the deal, scammers may try to swap your current investment for another one or convince you that your investment will increase in value soon.

Threatening legal action

Scammers may threaten you with prosecution or hefty fees to keep you from pulling out of the deal.

Using social media to approach you or your friends

Scammers may message you, display an advertisement in your social media feed, or send you a ‘friend’ request. They may pose as someone you know or are connected to, to gain access to your profile information and send you investment offers to make quick money. They may also use your information to impersonate you, creating a fake social media account to approach, and try to scam, people in your friends list.

Passing your call along the line

Investment scammers often use a team of less experienced staff to make the initial call. The junior staff follow a tight script to check your interest. If you take the bait, they hand you over to a more senior person, called a ‘closer’. Closers are extremely skilful sales agents and their job is to make you feel compelled to close the deal and send your money.

Calling or emailing you persistently

Investment scammers will call or email you endlessly or keep you on a phone call for a long time with promises of wealth or opportunities lost if you don’t take up their offer. They will not take no for an answer and will ask you about your worries to reassure you. If they can keep you talking or emailing, you haven’t really said no.

Operating from overseas

Many investment scammers operate from overseas or offer foreign investments, as their activities are illegal in Australia. Overseas scammers may target Australians because ASIC does not have international jurisdiction to prosecute them.

Learn more about the latest scams and what to look out for by visiting Scam Watch.

• Debts under control
• Emergency fund with minimum 3 months’ worth of expenses in a high-interest savings account
• Automated regular savings plan
• Adequate insurance for assets, eg. home, contents, motor vehicle
• Adequate personal insurance, eg. death, disability, income protection
• Set financial goals – short, medium, long-term
• Considered retirement needs (very long-term goal)
• Considered risk tolerance
• Developed an investing plan
• Chosen investments
• Put investing plan into place
• Considered making additional personal superannuation contributions
• Automated personal superannuation contributions
• Set reminder to review investments, financial goals and investing plan
• Rebalance asset mix if necessary