investments...

The best way to grow wealth is

• Seek advice
• Set goals
• Don’t spend more than you earn (Do a budget)
• Invest savings
• Diversify - spreading your money across the different asset classes, investment managers and stocks.
• Invest for the long term. Reacting to short-term market movements is usually wealth destroying.

The main assets classes are:

• Shares (sometimes called equities or stocks) represent a part ownership in a company. Income from shares is primarily profits from the company's businesses and is paid to investors in the form of dividends.

• Property: Investments in real estate. Income from property is primarily rent and fees from property and funds management.

• Debt securities: including cash (sometimes called fixed interest, interest bearing securities, income securities, bonds): Most of us are familiar with the word 'debt' as being borrowings from a financial institution, which are repaid with interest. As an investor, you can now imitate financial institutions by taking on the role of lender to a vast range of governments and companies all over the world. For when you invest in 'debt' securities you are actually lending money with interest being your return.

Each of these main asset classes can be further broken down into smaller groupings eg shares can either be Australian Shares or International Shares. Debts securities can be corporate debt, government debt or term deposits with a bank.

Investing in a Managed Fund

Managed Funds allow investors to pool their money with an investment manager who has extensive research facilities and investment experience. By having an experienced professional fund manager look after your savings takes advantage of increased investment diversification which results in lower risk and increased returns.

Investment returns are the reward you receive for investing and they are calculated by the

• change in the unit price of a fund. Changes in the unit price result from changes in the value of the assets in the fund, such as a change in the price of a share listed on the Australian Securities Exchange.

• income received from the assets, such as dividends from shares and interest from debt securities.

Investment returns and volatility

How much and how often the returns vary is 'volatility'. The word 'risk' is also used to describe volatility.
The amount of volatility varies between asset classes as illustrated.

Growth assets, such as shares and property securities, usually have more volatility because many factors can cause their value to change. But we also expect they will generally produce a higher return than other asset classes in the long-run.

Defensive assets, such as debt securities and cash, generally have lower volatility as their values usually don't change by large amounts. Cash and other low risk investments generally provide a lower return over the long term, but are unlikely to lead to a capital loss if held to maturity.

Diversification helps reduce volatility
It’s so important to have a range of investments in your portfolio, so strong performance from one asset class, investment manager or security can counter weak performance from another.

No single asset class, investment manager or security provides the best performance over all time periods, as the returns from different asset classes, investment managers and securities will be different. Therefore, by spreading your investment across the different assets your overall return will tend to be less volatile. This is called "diversification" and is a common way of reducing volatility.