A number of investment concepts are explained below:
* What are the different asset classes?
* What do we mean by 'Growth' and 'Income' assets?
* The two Rs - Risk and Return
Most investments can be broadly classified into five asset classes:
|Shares||When you buy shares, you're buying a 'share' in a company. This means that the value of your investment changes when the company pays dividends, or the company's share price increases or decreases on the stock market.
Of all the asset types, shares tend to earn the highest long-term returns. However, on the downside, the value of shares will fluctuate more than any other main asset type.
|Alternative Assets||This is a broad category of investments and investment strategies that sit outside the traditional asset classes of shares, property, fixed interest and cash. They include individual hedge funds, structured beta funds, infrastructure and derivatives.
Alternative assets will typically perform differently to traditional asset classes. This means that investors often use alternative assets to help diversify their investment portfolios.
|Property||Investing in property means investing in industrial, commercial or residential real estate. The value of your investment changes when rent is paid and through the increase or decrease in the property value.
In general, property provides returns which tend to be lower over the long term than those provided by shares but higher than fixed interest investment returns. Property returns often fluctuate more than those provided by cash or fixed interest.
|Fixed Interest||When you buy bonds (the main types of fixed interest), you're effectively lending money to a corporation or the government at a set interest rate. The value of your investment changes when interest is paid and when the value of the bond increases or decreases (with interest rate changes).
Over the long term, bonds have tended to provide higher returns than cash, but lower returns than shares and property. As their value can fluctuate, they are more volatile than cash, but generally less volatile than shares or property.
|Cash||Investing in cash is similar to putting your money into a bank account. You're investing in short-term fixed interest assets such as bank bills.
Interest is paid on the amount you've invested, and it's very unlikely that you'll lose money on a cash investment.
Growth and Income assets
The five asset types can be further grouped into two main categories: growth and income.
Shares, alternative assets and property - your returns from growth assets come both from the 'growth' in the value of the 'shares', 'alternative assets' or 'property' and from the income you received (through dividends and rent).
Fixed interest and cash - your returns from income assets come primarily from interest payments.
Growth and income investments have different risk and return characteristics. How much each investment option has invested in growth and income investments influences the risk and return characteristic of each option.
The two Rs - Risk and Return
Risk and return usually go hand-in-hand when you're investing. In most cases, the higher the long-term return you're aiming for, the higher is the risk of your money going down in value in the short term.
Risk is the potential for your super to go up and down in value.
Return is the amount of money your super earns from being invested.
That's because to get high long-term returns, you may need to have a lot in growth investments, and returns from growth investments can be volatile. Year-by-year returns from growth investments may vary more than returns from income investments. This means that there's a greater risk that growth investments will have a negative return in any one year.
Risk may also mean - not having enough money to live on in retirement. Choosing an investment option with less risk, may mean you earn a lower return on your money. Over a long period, even a small difference in your annual investment return, can make a big difference to your final benefit.