There is a range of issues to consider when investing in the markets to accumulate wealth. At Benchmark we have a network of research providers and contacts that assist us in providing valuable investment advice to clients. Our advice process and strategies cover areas including shares, managed funds, term deposits, gearing, investment savings plans and diversification.
Below is a chart indicating the benefits of having a Benchmark Financial Services adviser to build your long term wealth accumulation/investment strategy.
A share represents an ownership in part of a company. As a shareholder, you have an interest in the financial performance of the company and have the right to benefit from profits. Profits are paid to you through share dividend, and you can also benefit from an increasing share price. However, with financial gain also comes the risk of loss. As well as share prices going up, there is also the risk of them going down and if performance is poor, a company may not pay dividends to shareholders.
Shares have the potential to also deliver some taxation advantages, compared to other investment assets. According to the Australian Stock Exchange, “For Australian investors, dividends are often worth more than the cash payment they receive. This is because where companies have already paid tax on their profits, tax credits known as franking credits, may be attached to the dividends the company pays to you. These franking credits can be used to offset tax payable by you on other income. In addition, shares held for more than 12 months qualify for a 50% discount on any capital gains tax payable”.
Shares are also known as stocks, listed securities or equities. Within Australia, most companies that offer shares to the public are publicly listed on the ASX (Australian Securities Exchange).
Shares can be held in a number of ways for example, in a superannuation account or an Investor Directed Portfolio Services (IDPS) account. They can also be held directly.
Shares are usually considered an important asset class when capital growth is the desired outcome for a medium or long-term savings and/or investment goal.
A managed fund brings together the assets of many investors into a single investment. The managed fund can include a variety of assets including property, shares, international shares and cash. They can also be geographically focused such as Asia or Australia, or focused on a single asset class or specific industry sector.
A fund manager runs the investment and pools funds according to an investment objective, philosophy of strategy. There are over 100 fund management firms in Australia and many of them offer several kinds of managed fund products.
Investors hold ‘units’ in a managed fund. The price or value of those units moves up and down like a share price does.
A managed fund can be used for a medium or long-term savings goal. They can provide investors with a higher level of diversification and access to the skill of expert investment managers.
A term deposit is a deposit of money with an Authorised Deposit-taking Institution (ADI), usually a bank or credit union. Your money is held for a fixed period with a rate of interest for the period of the deposit. It is annualised if the term is less than 12 months.
The following features can apply:
Term deposits can be used to achieve your short, medium or long-term savings goals. They can provide you with access to regular returns and the return of your deposit at the end of the term. However, since it is generally considered a low risk investment option, a term deposit might not be the best performing asset over the long term.
Gearing involves borrowing money to invest in income producing assets such as shares or managed funds. This can provide you with opportunities to build your wealth.
Gearing involves a higher level of risk. Not only does it place your investments at risk, but also you may end up paying debt interest on assets that have fallen in value due to adverse market movements. Gearing may be tax effective, but it is only profitable if the investment returns exceed the after-tax cost of borrowing.
By taking out a loan, you will be required to pay interest until the loan is paid back. Depending on the type of loan, some security will generally be required.
Using a gearing strategy means you will acquire debt. You will need to consider the advantages and disadvantages before embarking on this kind of strategy as both returns and losses can be significant when compared to investing without gearing.
Negative gearing occurs when the return is less than the borrowing costs and is only beneficial if the excess tax deduction can be used to offset other taxable income. For example, where the dividends from a geared share portfolio are less than the interest payments on the loan used to purchase the share portfolio. Under present tax rules, you can claim the loss as a tax deduction against other taxable income and this can provide you with a benefit.
Gearing may be suitable for people who:
Investment markets fluctuate, making it difficult to choose the best time to invest. One strategy to cope with the risk associated with investing in volatile markets is DCA. DCA involves investing a set amount on a regular basis, no matter whether the market is up or down.
Dollar cost averaging may be suitable for people who:
Diversification refers to spreading your investments across a wide variety of asset classes to reduce investment risk.
Each of your investments can perform differently at different times of the economic cycle. It is impossible to predict which of your investments is going to be the best performer from one year to the next.
There are generally four ways a financial adviser can implement diversification as a part of your investment strategy. These include:
Diversification may be suitable for people who: