There are various strategies that investors follow to manage their investments. Passive investors generally prefer to invest in strategies that are more “defensive” in nature. This happens mainly with investors who do not understand the nuances of investing and prefer not to take risk.
Financial Advisors also need to consider the best interests of the client and after having assessed the client’s personal circumstances and knowledge of investing would prefer to take conservative approach.
Defensive Approach: Usually you would end up investing around 60% in growth assets (shares, properties, units) and 40 % in defensive assets (fixed income, cash)
If you are an active investor and understand investments, it is possible that you would be more towards “aggressive” investment strategies.
Aggressive Approach: Investors would prefer to have around 70 % to 80 % in growth assets and balance in defensive assets.
The main factors that influence investors to take risk and move toward aggressive approach is yield.
Since most money in banks and fixed income investments do not give you a return of more than 2% per annum, investors must skew their investments towards growth assets to at least try and achieve a return of at least 6% to 8%.
Investment Options Available:
There has been a vast range of investment products that are available in the market and most of these investments could be in form of:
a) SDA - Self-Directed Accounts that allow you as the client to decide your investments and direct composition of your portfolio
b) MDA - Managed Accounts that are investment portfolios professionally managed by specialist investment manager who are appointed as a "Program Adviser
c) MF - Managed Funds is a pool of money invested by many people with a Fund Manager with common stated investment objectives
Though traditionally Managed Funds are popular as they are usually cheaper to operate but Managed Accounts are getting popular now. The main disadvantage of MF is that the client’s own units in the funds and are not beneficial owners of the shares whereas MDA provides you with beneficial ownership of the shares.
It is advisable that you seek advice from your financial advisor before you decide to invest in these products as they require research and not all funds give you your desired outcomes.
New Buzz in Investments that now getting popular are:
Alternative investment:
These are a new class of investment products that clients are investing now days and they are becoming popular.
These investments are non-cyclical and are not impacted by volatility in market. They have an inherent cashflow and return and they are insulated from share markets that are falling or rising.
Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of the complex natures and limited regulations of the investments.
They include products like:
* Property Units
* Hedge Funds
* Private Equity
* Commodities like gold, oil
* Derivatives like currencies, indices
The returns can be extremely high, and they are reasonably secured. However, exposure to these investment products is not easy for retail clients. You would need the services of a wealth advisor to get exposure to these class of assets.
Exchange Traded Funds (ETF):
ETF, s is also one of the fastest-growing categories of investment products in Australia and the World.
ETFs are an investment product offered through the Stock Exchange that will offer ownership in a basket of underlying assets (not individual shares) that could be
* Indexes like ASX 200, NASDAQ, etc.
* Sectors like Finance, Retail, Technologies
* Countries like China, Japan, MSCI, etc.
* Commodities like Gold, Silver, etc.
* Inverse products like bear markets for stocks, commodities, etc.
Advantages
* Can get exposure to diverse markets and sectors including overseas
* Liquid and fairly tradable like shares through the Stock Exchange
* Extremely tax effective with receipt of franking credit distributions
It is probably the cheapest way to get exposure in quality shares and products where cost of MER could be as low as 0.5%.
Investment Bonds:
Investment bonds are “tax paid" investments, a great alternate to investments for retirement outside superannuation that have no restrictions of contribution caps, work test or condition of release. Some great benefits are on tax and help clients build a good portfolio over time.
* It's tax paid while invested, so there is no personal assessable income and no need to include in tax return
* Withdrawals made after the ten-year tax period are free of personal income tax
* Franked dividends reduce the amount of tax paid within the investment bond
* Benefit from no personal capital gains tax upon withdrawal or when switching between investment options
Various Investment Platforms Available:
As we know that investments can be both in superannuation environment and they can be simply outside superannuation. Most Industry and corporate superannuation funds run their own custodian services.
With the advent of Self-Managed Super Funds (SMSF), there has been a spurt of other investment platforms both inside super and outside. These are generally called Investor Directed Portfolio services (IDPS) or in layman terms WRAP.
The advantage of having a WRAP is that even though investor does not need to assume the role of a trustee like in SMSF, they can manage and invest in a wide range of products that were discussed above.
Most Industry or Corporate Funds mainly in superannuation will not permit you to invest in products outside their limited scope.
Most IDPS / Wrap platforms offer full custodian services and will help you with investing, researching and giving you profitable alternatives. You would need a financial advisor to advice and confirm if the products and the IDPS platform are suitable to you.
Please see how the IDPS Flowchart works for the clients.
With the help of a suitable investment structure and well researched products it is possible to invest in a market with a proactive approach.
You do not need your superannuation fund tell you that you have lost 30% of your fund value because the market has crashed. You could act proactively and with the help of your advisor move investments to more defensive products so that you could mitigate your risk.
• Author: Vic Singh, CA, ADFP – Virtual CFO, Chartered Accountant and Financial Planner, helping business clients with their business advisory services and setting up systems for improving their profitability, productivity and financial efficiency.
