Investment basics

Intelligent investing is the cornerstone of financial success, but it’s not a skill we’re born with.

Just as you should learn to swim before diving into a pool, learning the investment basics will help you make the most of opportunities to grow your wealth, while also managing the potential risks.

Armed with knowledge and a disciplined approach, you’ll have every chance of achieving your financial goals.

Before you start

Investing is a big decision, and getting started can often be the hardest part. Here we take a look at some of the basic elements of investing and the things you should know before you begin.

Set a goal

Before you even start investing, you need to have a goal. What is it that you want to achieve, and when do you want to achieve it?

Your goal might include saving for a home, a child's education, retirement or simply the peace of mind that comes with financial security. Whatever the goal, knowing how much time you have to achieve it is very important since this will determine the best type of investment to help you get there.

Generally, your goal will fall into one of three timeframes:

  • Short-term – up to 2 years
  • Medium-term – 2 to 7 years
  • Long-term – 7 years or more

It's important also to remember that the earlier you start investing, the better off you will be. That's because you not only have more time to accumulate wealth, but you also benefit from what's known as compound interest.

Compound interest is the concept of adding accumulated interest to the principal, whereby you begin to earn interest on interest. It's no wonder John D. Rockefeller once called it the eighth wonder of the world.

Asset classes explained

We've all heard the term 'asset class', but what does it really mean?

Assets generally fall into one of two categories - 'defensive' or 'growth'. Defensive assets tend to be income-producing and are usually suited to short-term investors or those who prefer safer investments with more consistent returns. Examples of defensive assets are bonds and cash.

Growth assets tend to be higher risk / higher return assets and are usually suited to long-term investors who are willing to endure the peaks and troughs associated with their investment. Examples of growth assets are shares and property.

Below we take a closer look at each of the main asset classes.


Cash is a stable investment that provides steady returns. While the chance of losing money is remote, the returns tend to be the lowest of all asset classes.

Examples: bank deposits and short-term money market securities.

Fixed interest

Over the long-term, fixed interest tends to provide better returns than cash, but lower returns than property and shares.

Examples: securities such as bonds and debentures.


Over the long-term, property tends to earn more than fixed interest or cash, but less than shares. You can invest in property either 'directly' by purchasing real estate or 'indirectly' by investing in a fund such as a property trust that uses pooled investor funds to purchase real estate.

Examples: industrial, retail and commercial real estate.

Alternative assets

Over the long-term, alternative investments tend to earn more than property, fixed interest or cash but fluctuate in value more in the short-term, so they carry a medium to high level of risk.

Examples: infrastructure projects such as roads and airports, gold and art.


Shares tend to earn the highest returns over the long-term but are more likely to fluctuate in the short-term, which makes shares a higher risk investment.

Examples: units of ownership in any company listed on the Australian Stock Exchange.

Asset allocation

Asset allocation refers to the distribution, or weighting, of each asset class within your investment portfolio. For most people, their investment portfolio will include a mix of defensive and growth assets, though others will invest entirely in one or the other.

Asset allocation is usually determined based on the level of risk you are willing to take. For example, if you are a conservative investor, you might invest 70% of your money in cash and bonds and 30% in shares and property. However, if you are an aggressive investor, you might invest 70% of your money in shares and property and 30% in cash and bonds.

Risk vs return

Different investors have different risk tolerances, i.e. the level of risk that we're prepared to take. When determining which investments are best for you, you need to consider your own investment timeframe. That's because each asset class has a unique time horizon. For example, if your time horizon is one year, you might consider a cash investment, such as a term deposit. However, if your time horizon is five years or more, you might consider investing in shares.

As an investor, you aim to get the highest return possible at a level of risk you feel most comfortable with. To that end, you need to consider how tolerant you are of market fluctuations and the probability that your investment returns may not meet expectations. Remember, some investments will even lose money.

Income vs growth

The type of investment you need depends on whether you require capital growth for the future, income from your investment for now or a combination of both.

Some people, such as retirees or those with short investment timeframes, may choose to receive an income from their investment. Income is generated from the interest and dividends earned from the investment. Bonds and cash are examples of income-producing investments and they generally provide stable and regular returns.

Growth assets, such as shares and property, generally suit people who want to invest for five years or more. These types of assets grow your capital with moderate levels of income over time. Investors wanting to generate wealth over the long-term should consider placing a greater portion of their investment into growth assets. While growth assets can be volatile over shorter timeframes, they have historically produced greater returns than income assets.

Volatility and investment strategies

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Investment markets move up and down. They can vary from providing strong returns year after year to a sudden drop, which can be quite alarming for some investors.

Over the 25 years to May 2013, several major events significantly impacted the direction of Australian and global investment markets, including the so-called ‘GFC’ from 2007.

However, markets do tend to recover with time, as the graph shows.

It's important to remember that having an investment plan and sticking to your goal can help minimise the impact of market volatility and keep your investments on track.

Investment strategies

There are a number of simple investment strategies that you can use to help build your investment portfolio. Some strategies help you to increase your investment more quickly, while others may be more tax-effective or can reduce the impact of market fluctuations.


All investments contain an element of risk. These risk characteristics are not always the same for each investment, meaning that what may affect the value of one investment may not affect another.

By spreading your portfolio across different investments, or diversifying your investments, you can reduce the effect of one investment on the performance of your overall portfolio.

Diversification ensures that your investment dollar is spread across a range of investments in line with your investment objectives. And by balancing your portfolio across a range of investments, you give yourself the opportunity to maximise your returns whilst minimising your risk.

Staying invested

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'Time heals all wounds'. It's a common saying but one that's very powerful in an investment context.

Often it's the investments that have the greatest risk of losing value over the short-term that produce the best return over the long-term.

That's why many professional investors use the old adage: 'It's time in the market, not timing the market that matters'. By investing for the long-term, the effect of short-term losses is neutralised.

Timing the market means second-guessing; choosing the best time to buy and sell investments. This is extremely difficult. Many professional investors believe the risks of trying to second-guess market movements outweigh the benefits.

Consider the above chart. Over the period from January 2002 to March 2013 the ASX 300 Accumulation Index returned an average of 10.2% p.a. Deduct the 10 best days on the market from the 2,535 trading days in the period, and that return drops to just 1.2%. And as you can see, the return falls more and more rapidly as you take away more of the best trading days.

If you would like further guidance or advice on your superannuation, please make an appointment with a Suncorp Financial Adviser.

Chasing returns

One of the greatest temptations when deciding where to invest your money is to choose the investment that had the best return last year, whether it's shares, bonds or property. However, chasing returns is one of the most common mistakes made by investors.

As the table below shows, it's rare for the same asset class to have the best performance two years in succession. History has shown that if you invest in the asset class that performed the best last year, it's unlikely to have the best performance again this year.

If you would like further guidance or advice on your superannuation, please make an appointment with a Suncorp Financial Adviser.

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