Money Matters Investment & Finance Investing: risk and reward
Investing: risk and reward
Saturday, 01 July 2006
PDF Print E-mail

money2_TN.jpgWith a dizzying range of options such as the stock market, real estate, superannuation, and managed funds, today's investor faces bewildering choices on how to maximum returns. To navigate this slippery slope, Medical Forum gave two financial experts hypothetical sums of money within reach of the ordinary investor - $10,000 and $100,000 - and watched the beans tick over.

Profiles

Any form of investment is a gamble. In some cases, the risks and potential benefits could be equal to a bet at Ascot or a spin of the roulette wheel, only with a longer term focus and a much larger sum of money. This is where risk profiles come in. Choose your strategy well before parting with your money. This will depend on your goals. For instance, an aggressive young investor looking to retire at 50 will go for a high-risk, high reward profile, whereas an investor aiming for a secure retirement will look at a safer, modest return investment portfolio

Managed funds

Having someone else spend your money may seem at odds to a sound investment strategy, but managed funds pool together the resources of many investors, large and small, to stretch you dollar further. The old adage "it takes money to make money" is exemplified by the success of multi-billion dollar managed funds and their fund managers.

Gary Thornley from ABN Amro Morgan points out that $10,000 (or even $100,000) doesn't go very far in today's investment climate.

"With $10,000, you need to look at a collective vehicle like a managed fund or a listed investment company. $100,000 again is probably too small an amount for diversification when investing directly."

Iain Jeffery, financial planner for Medfin, aims his sights higher for direct investment.

"You need about twenty different stocks to get a decent diversification in your portfolio ... it isn't cost effective until you get around $300,000 to $400,000."

Slow and steady

Term deposits are often the first port of call for investors looking for a modest but guaranteed return. Using our $10,000 example, a standard Bankwest term deposit (as at June 2006) will provide a 5.55% return after twelve months ($535) or a 6.2% return after five years ($3100). Investing $100,000, the rate is 5.8% after twelve months ($5800) and 6.4% after five years ($32,000). Small returns, but safe ones.

Playing the market

The stock exchange is popular right now, but our experts identified a coming shift away from stocks towards property.

"We're at the same point we were a few years ago, except in reverse, where property was coming to the end of its run and the share market was starting to get going again." Iain says.

With the choice of hundreds of different local shares, plus thousands more international shares, the share market represents an investor's smorgasbord. The success of share traders is linked to choosing strongly performing companies and taking the occasional punt of boom stocks and price variations. This is where an experienced financial planner or stockbroker comes in.

While riding the market may appear capricious, there are some stocks to steer away from. Iain considers any stock outside the ASX200 to be risky business. "If there is a general market downturn, it will be very hard to find a buyer for the stock you wish to sell. So there may be nothing wrong with the company but getting rid of your shares would be a problem."

Bricks and mortar

According to the Real Estate Institute of WA (REIWA), median house prices have skyrocketed by as much as 43% in the last twelve months. Glen Forest currently tops the list at a 43.8% increase, with Mosman Park at 40.8%, and The Vines at 38%. The net property value increase in the Perth metro area is 23.9% over the last twelve months.

Real estate is more than buying the house down the street. A variant to residential ownership (which brings rental income as well as property value increase for the astute investor), negative gearing (paying off an interest-only mortgage) enables an investor to reap tax kickbacks through income minimisation while the property value goes up. Theoretically, the property is sold down the track and the debt is paid, along with a profit based on the increased property value. The key to any real estate investment is to choose a property that will increase in value over time. Coastal property, such as the suburbs west of the Mitchell Freeway, is always worth a look.

A safer option to direct property investment is to sink your money into a commercial property trust, which makes all the decisions for you. These are variants of a managed fund.

Is super really super?

Gary, a superannuation expert, views the forthcoming changes to super laws as very attractive to investors, particularly the ability for over 60s to draw an income or lump sum from superannuation tax free.

Of the down sides, he points out "The sting in the tail is we are going to have tighter limits on how much we can put into superannuation." Specifically, over 50s can invest a lump sum of $100,000 into super per year, whereas under 50s will be restricted to $50,00 per year.

It is important to note that superannuation fund managers use your super contribution and invest that money into the same markets such as shares and property as regular fund managers.

<subhead>Biotech: Get rich quick?

Despite the reputation of biotech investment as the get-rich-quick scheme of the naughties, our experts agreed that biotech stocks were more an investment for the long haul. While Gary took a more optimistic approach, Iain rates biotech stocks as a high risk, describing them as "sentiment stocks."

"If the market is having a good day and people feel kindly towards them, then the stock goes up," he says.

Iain also makes a very important distinction between biotech stocks and other medical or pharmaceutical stocks.

"Biotech stock is basically a stock that loses money while trying to get a product to market. Once it has a product to market, it then becomes a pharmaceutical company because it has started making money."

Bank of Mattress?

So what about storing that cash under the mattress? Sure there are no bank fees or potential losses, but as a strategy to grow your money, it is a dud. With inflation pushing costs up year after year, when you retrieve your wad of cash, you'll find it has significantly less value than when you hid it away.

 

 

The views expressed in this story represent the general opinion of the experts involved and should not be taken as financial advice. For advice on investing relevant to your situation, please consult your financial planner.