All investments are designed to grow, but they can also go down in value. Generally, those investments with the highest potential to grow are also more likely to go up and down along the way. That’s why investors talk about finding a balance between risk and return.
Income assets, such as cash and fixed interest usually offer a steadier more reliable return. Whereas growth assets, such as property and shares have more potential to grow over time, but are more likely to go up or down in value in the short term.
The graph below shows how different investments have different risk and potential return profiles
It is intended solely to illustrate this concept – it is not a prediction of the future returns from, or the investment performance of any Westpac investment options.
Different investment types can help you meet different investment goals. Here are the key features of the four main asset classes.
A cash investment is often a bank deposit.
- Cash is generally secure so your investment is unlikely to drop in value in the short term. It’s also easy to access your money giving you high liquidity.
- Returns from cash are generally lower compared to other investments types. If you’re saving over the long term your ‘real return’ after tax, fees and inflation may mean that you can buy less with your money than when you started.
- Best suited for: short-term goals, or for an emergency fund.
Term investments and bonds are investments over a fixed period with fixed interest rates.
- Usually offer better interest rates than cash over the long term.
- Fixed interest products can offer higher fixed-rates than a cash investment, but your money is locked-in for the period of your investment. If you need to get your money out early, you may lose the benefit of the higher rate.
- Best suited for: short to medium-term investors looking for potentially higher rates than cash investments.
Property usually generates rent that could give you an income on your investment. It can also increase in value over time. Property is best as a long-term investment because of the high cost of accessing your money.
- Regular income from rent along with any gains in value, if you invest in the right properties, can provide potentially strong long-term returns.
- Your money is locked-in and you may lose value in the short term. Property also needs to be maintained to keep its value.
- Best suited for: long-term growth investments over time. People can invest directly in rental properties, or invest through property-led managed funds.
Shares are an investment in part of a business. Investing in shares is often through the sharemarket. You can earn an income through dividends and make money through any gains (selling a share for more than you paid for it).
- Has the potential to generate higher returns by investing in companies at the right time.
- The sharemarket goes up and down a lot. Shares may also increase or decrease in value more than other investments. Usually shares are best as a long-term investment so you can ride out any ups and downs.
- Best suited for: Long-term growth strategy. Many investors choose to invest in shares through a managed fund where experts look after the buying and selling of specific shares.