One of the key steps in deciding which assets to invest in is determining your tolerance towards risk. As an investor, you need to decide how much risk is too much, for the return that you are trying to achieve. As potential returns from different asset classes increases, the underlying risk also increases. For asset returns in Australia, click here.
The asset types available to you typically fall into one of two categories: defensive or growth. Those in the defensive group (cash and fixed income) normally consist of a return and risk level lower than that of the growth group (property and equity). Also, growth assets tend to have higher capital gains than defensive assets. However, the volatility of returns (how much they differ from the average) is greater for growth assets.
Being the least risky asset class, cash can be invested at the current market interest rates such as those provided by banks. As there is virtually no risk, they grow at the risk free rate. Currently at a record low due to the coronavirus pandemic at just above 0%, these rates offer a sure, minimal return. Before 2020, the target cash rate set by the RBA has been between 2% and 3%.
Fixed income assets, also known as bonds, are a bit riskier than cash. As such, they offer a return that is slightly higher, depending on the issuer. With an average return over the past years prior to Covid-19 between 3% and 5%, these assets carry credit risk. This is the risk that the issuer (company) is unable to meet the timely payments to the holder (investor).
As the least risky growth asset, property assets have been producing an average of between 5% and 7%. Averages in annual returns is highly related to the location of the property (cities, growing suburbs, etc.). The Australian housing market has been growing over the recent decades, with some saying that there is a housing price bubble.
The riskiest asset class in this list is equity, or shares. This includes both domestic and international shares, with average returns between 7% and 11%. With the greatest level of volatility, these assets carry the greatest risk but offer the highest potential returns. Diversification, the act of not putting all your wealth into one asset type/sector, is key when investing in equity. However, macro scale events such as Covid19 can cause widescale losses.
Your risk preferences are a guide
How willing you are to bear risk is vital in knowing which assets you should invest in. This is often linked to what life stage you are at. Completing a risk profile will help demonstrate your risk levels and how to allocate your wealth. Endorphin Wealth keeps your preferences in mind when helping you plan for the future that you want.
Here at Endorphin Wealth, we are not licensed or owned by the big banks and financial institutions, so the advice and wealth management we provide is always in our client’s best interests. We have the advantage of being able to access a range of products from different providers that can be tailored to our client’s goals and needs. We have offices located in Sydney and Melbourne, where you will be able to find a financial advisor that is suitable for you.
For an obligation free conversation about your financial future, please contact us on 03 9190 8964 or at email@example.com