Investment info and discussion.
Some investment basics
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posted 08-02-2003 06:53 AM
The variety of investment products available can be very confusing. However, it becomes easier to understand if you think of investment products under three main categories:
* income producing investments;
As you read on, these categories will be explained. Despite the wide variety of investment products available, they derive from three basic types of investments:
* interest bearing products
Before you invest in a particular product, you should think about the following investment guidelines.
Do you want your investments to earn income or capital growth?
Do you need emergency money, longer-term investment money, or perhaps both?
If you are prepared to invest your money for a longer term, for example more than five years, and are prepared to accept some short-term losses in exchange for expected overall long-term gains, you may want to consider growth investments.
Growth investments such as property trusts and equity trusts should not be regarded as short-term investments, no matter what the advertising may suggest.
Do the company and its products have a reliable track record?
Carefully check any guarantees to see exactly what they cover. For example, a fund may be guaranteed as capital stable over a monthly period, or it may be guaranteed over a yearly period, which means that there could be fluctuations below the capital value during that time.
Remember - guarantees are only as good as the company providing them. Satisfy yourself that the investment is suitable by asking questions and by carefully reading all the information provided. And past performance does not predict future returns.
Are you varying your investments to reduce the risk?
You may want to spread your money with several different institutions, with various investment types and across different markets, such as cash, fixed interest, shares and property.
If you are investing in fixed interest investments, it may be wise to spread your money so that you have different maturity dates. This reduces some of the risk if interest rates change. It can also provide you with income on a more regular basis.
While you should always spread your risk over a number of investments, having many small investments may involve you in a lot of supervision, and the returns may be lower.
What level of risk are you willing to take for the returns involved?
* general changes in the economy;
Many investors who have been attracted by promises of high returns have lost money by not carefully considering the risk. Investing safely means not investing in a product just because everyone else is. When the interest rate being offered is unusually high, always check the risks involved. If a return looks too good to be true, it probably is.
You should consider not only the risk of losing some or all of your money, but also the risk of not getting the returns you expected. To minimise your risk, your best investment may be a savings account or term deposit.
If you have already retired you may not be able to replace any losses. Therefore you may prefer to settle for a lower, but steadier, return rather than to risk your life savings on an expectation of greater returns.
If you are a younger investor, you should consider growth on your investments. Remember, growth means some level of risk.
How much debt can you afford?
Retirement is not a time to take on debt, as you may not have a way to earn extra money to solve any problems.
Home Equity Conversion loans are different from other types of loans in that the loan repayments can be deferred - they can be paid from your estate.
How does compound interest work?
Say, for example, that you invest $10,000 in an interest bearing account for 10 years and earn 7 per cent interest per year.
With no compounding: at the end of 10 years you would still have your original $10,000. You would have earned $7,000 in interest, giving you $700 each year to spend.
With compounding: at the end of 10 years your original $10,000 would have grown to $19,672. You would have earned $9,672 in interest, although this would not have allowed any spending money. By compounding your money, this investment would have earned you an extra $2,672 over 10 years.
Compounding interest helps your investments grow at a faster rate. Compounding also applies if you reinvest share dividends or distributions from managed investments.
If you decide to compound the interest, tax is still assessable on the interest earned each year. Depending on your circumstances, you may need to set aside money to pay the tax.
Leaving your money in a superannuation fund until your final retirement, or putting more money in earlier in life, is a very effective way to take advantage of compound returns.
[This message has been edited by Share_market_information (edited 08-02-2003).]
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