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The four basic ways to invest

Cash, bonds, shares and property: Sally Patten explains maximising returns is about getting the mix right.

There are four basic ways for most of us to invest: cash, bonds, shares and property. Each of the options have advantages and disadvantages. It’s all about the mix.

Having the right mix of risky and less risky investments to suit your profile is key – and helps you towards becoming financially independent.

Cash is, well, cash. Banks and credit unions have a variety of products, including online savings accounts and term deposits, all of which offer a rate of interest that is paid at set intervals. On the upside, the risk of loss is low compared to many other asset classes.

Bonds are investments where an investor lends money, typically to a government or company, for a set period. Again, an investor receives a set rate of return and will usually get their money back at the end of the period. However, bonds are tradable and the bond holder may sell their bond before maturity. 

  

Shares are an altogether different proposition. A share is a unit of ownership in a company. Buying shares in a company does not give the investor direct control over the company’s day-to-day operations, but it does entitle the investor to receive a share of the company’s profits.

In many cases companies will distribute a portion of profits to shareholders twice a year via dividends – although it has to be said that some companies distribute a whole lot more of their profits than other companies.

In addition to receiving a share of the company’s profits, shareholders will hopefully see growth in the value of the shares and be able to sell them at a profit. On the flipside, the company may not grow at all, or meet some disaster, and the value of the shares could fall, even to zero. That is the risk investors take.

With property an investor can invest in residential and commercial properties and usually rent them out to receive a regular income. Over time, the investor hopes the value of the property will rise so it can be sold at a profit, although unfortunately this is not a given. Property prices can fall as well as rise.

The point is that the first two investments – cash and bonds – tend to earn very low returns. Shares and property can – and usually do over a long period – rise in value. But prices can fall too.

Having a mix of investments is important. Indeed it is important to have enough diversity of property and shares to make sure that your money grows over time. If it doesn’t grow in value, you will have to work a lot harder over your working life to stay in the same spot.

Keeping finances simple

Lyndall Mitchell (pictured) believes finances affect your wellness as much as food and exercise and can cause an enormous amount of stress if neglected. That is why the entrepreneur makes sure she’s well informed about asset allocation.

“I make sure my financial decisions help me get what I want from life,” says Mitchell, 41, a mother of two. “Because our lifestyle is so important to us, I don’t want to be living with stress, the stress of high-risk investment decisions.”

And it means keeping things simple, even with an increasingly successful business.

The business, Aurora, is debt free 18 years after it was started by Mitchell in Melbourne. It now includes four top-end spas in three states, a spa-management training division, a line of spa products and an exclusive supply deal with Qantas Airways.

“The cheapest way [for us] to borrow is against the house and we put it into the business,” Mitchell says. “We’re not going to take too much risk as it’s our home so it comes back to living within your means. At the moment we’re focusing on investing our time, effort and money into our ethical business, which will deliver long-term rewards.”

A life coach and corporate speaker, Mitchell says she is guided by good business heads. The other shareholder in the business is the former Toll Holdings chief Paul Little, a long-time mentor. Her father-in-law is a retired financial planner. Her own father was a Queensland banana grower who used to bury his spare cash on the farm.

“We’ve been property focused but now the primary focus is the business,” Mitchell says. “We also see the renovations we’re doing on our home as an investment into our lifestyle.

“My strategy in life is health, family happiness and economic security and every single day I work towards each of those. Money is about the ability to have freedom of choice.”

Case study: Natasha Hughes

  

September 2016