The Importance of Investing

Congratulations! You’ve saved your hard-earned money! When thinking about what to do with this money, are you then afraid of losing it? Is this what you’re thinking when trying to decide what to do with your savings and investing in say the stock market? As individuals we are loss averse and losing our money is the biggest fear for all investors.

When it comes to investing your cash, there are several asset classes. An asset class is a type of investment, with the most common being cash, fixed interest, shares (or equities), property and alternatives. Within each of these asset classes you can invest either within your local market or internationally.

Each asset class has a different level of risk and return. Typically, the higher level of risk, the greater your return should be, and this will depend on what you are investing in with each asset class and the associated time horizon for the particular investment.

Cash

Leaving your money in cash and/or investing in cash’s equivalent such as term deposits will provide you with a stable, low risk regular income in the form of interest payments. Cash is considered a defensive asset and would usually be held for a short time period, excluding any emergency cash reserves.

Fixed Interest

Fixed interest investments come in many forms including government and corporate bonds, Treasury notes, debentures, fixed interest trusts, bank bills etc. Fixed interest investments pay you a regular interest payment over a fixed term. The interest rate and level of risk will vary depending on the type of fixed interest investment. Fixed interest is considered a defensive asset and has a one to three-year investment time frame.

Equities (Shares)

Investing in equities gives you part ownership in a company and the right to receive a portion of the profits, commonly referred to as dividends. Returns will usually include capital growth (or loss), and income through dividends. Investing in international shares introduces currency risk. As the value of shares can go up or down and are reported on a daily basis, they are considered to be riskier than cash or fixed interest. Shares are considered a growth asset and it is recommended that you hold shares for at least five to seven years.

Property

You can invest in property either via directly purchasing or via property securities and Real Estate Investment Trust’s which are shares in property investments. Sectors include commercial, retail, hotel and industrial property. You can invest in both Local and International property. Property is considered a growth asset and it is recommended that you hold them for at least five to seven years.

Another asset class to consider is the alternative investments which can cover a wide range of investment opportunities. The major categories include private equity, hedge funds, infrastructure, emerging markets, gold and other commodities, materials and Agribusiness (Agricultural Investments). An investment is usually considered alternative if it has a relatively limited investment history, has clearly differentiated features from any traditional asset class, requires specialist skills to manage and is typically not common in investment portfolios. Depending on the specific asset, alternatives can be considered either a growth or defensive asset.

When investing the only free lunch is diversification! Diversification helps to reduce risk by spreading your investments across a range of asset classes. Diversification is basically avoiding putting all your eggs in one basket.

Diversification can reduce the volatility of your portfolio (the value going up and down). It aims to manage the returns on your portfolio over the medium to long term.

Another smart investing technique to manage market volatility is where investors utilise a ‘dollar-cost-averaging’ strategy (investing equal amounts into their portfolios on a monthly basis) actually take advantage of excellent buying opportunities that are presented during periods of volatility. Such strategies passively add value to client’s portfolios and prove very beneficial when markets recover. In any case, if investors hold their investment to their intended timeframe they won’t have any reason to fear market volatility.

Disclaimer: The information is brought to you by Aon Hewitt Consulting (Shanghai) Co. Ltd. registration number 310000400102466. The information does not take into account the specific investment objectives, financial situation or particular needs of any particular person who may be in receipt of the materials. Accordingly, it should not be relied on or treated as a substitute for specific advice concerning individual situations. Please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase an investment product. You are also recommended to obtain such other professional advice where appropriate. The information is provided in good faith and believed to be accurate as of the time of compilation. We do not undertake an obligation to update the materials or to correct any inaccuracy that may become apparent at a later time. You should always consult primary or more accurate or more up-to-date sources of information.