Last updated: April 22nd, 2024
Saving a few hundred (or a few thousand) bucks monthly is a great habit. Your money compounds and can add up to a substantial sum after a few years.
But how to invest money when quick-rich schemes are everywhere, Australian politicians are bracing for a hard landing while China’s economy and the price of oil continue to wobble?
Moreover, certain asset classes can act as an effective hedge against Australia’s stubborn inflation (i.e., the weakening value of your money).
Australians’ main investments are typically their family home and their superannuation.
Important!
Unfortunately, the home is a very illiquid asset, while your super contributions are typically managed by your super fund (unless you opt to self-manage via an SMSF).
Let’s examine your investment options beyond home and superannuation while discussing their potential upsides and risks.
(Related: Will The Interest Rates Rise In 2024?)
1. Cash.
All big Australian banks still offer term deposits that let you earn higher interest on your savings but lock up your money for a certain time period.
Those days are over, but you can still find a rate in the high 4 percent range.
| Bank | 12-Month Term Deposit Rate |
|---|---|
| ANZ | 4.7% |
| NAB | 4.7% |
| Westpac | 4.25% |
| CBA | 4.75% |
| AMP Bank | 4.75% |
| Macquarie Bank | 4.65% |
Above: Australian term deposit rates, $100,000 or more, for 12 months, as of March 2024.
You can also invest in the cash asset class through managed funds and easily tradable ETFs (more on how these work below).
(Related: Will The Australian Dollar Rise In 2024?)
Examples of funds where the assets held focus on cash include:
- Betashares Australian High-Interest Cash ETF (ASX: AAA) provides exposure to Australian bank deposits, with interest paid to unit holders monthly.
- Vanguard Cash Reserve Fund (Managed Fund) invests in “high-quality, short-term money market instruments and short-dated debt securities”. In other words, monetary contracts are issued by banks and corporations with a high credit rating (A-).
Important!
Do you have more than $1,000,000 in your savings accounts? Can call your bank and negotiate an even higher interest rate.
2. Fixed Interest.
Fixed interest includes various types of government and corporate bonds. Bonds are essentially debt securities, where the investor loans the government or corporation money.
How do investors set out to make money from bond investments?
- The bond issuer pays regular interest on the loan value over a pre-determined period, ranging from 1-30 years. The interest rate can be modest, but it’s generally a guaranteed amount, which is why this investment class is also called ‘fixed income’.
- They also get back their initial investment amount at the end (known as the maturity date).
You can purchase bonds via the ASX or directly from some government agencies. You can also gain exposure through ETFs listed on the ASX.
(Related: How Do Bonds Work?)
3. Shares (Australian & International Stocks).
You can own part of a company by purchasing shares it issues via stock exchanges.
Any Australian with an account on an online trading app can become a shareholder of major corporations like Woolworths [WOW], BHP [BHP], Apple [AAPL], Tesla [TSLA] or Amazon [AMZN] for as little as a few hundred dollars.
People invest in publicly-listed companies based on a belief that their share prices will increase over time—the value of your capital grows (because you can sell your shares at a higher price).
Important!
Some companies pay dividends to shareholders, but their stocks usually see relatively modest price increases.
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4. Exchange-Traded Funds (ETFs).
ETFs emerged in the 90s and have become hugely popular because they simplify investing in multiple assets with one purchase.
(Related: Ultimate Guide To ETFs).
As a pooled investment vehicle, your funds are combined with other investors’ funds and used by the ETF provider to create a basket of assets.
However, underlying assets in an ETF’s portfolio include shares, bonds, money market instruments, futures contracts, commodities, currencies and cryptocurrencies.
Important!
You don’t own the assets, but you benefit from returns on the assets’ performance which can include realised capital gains (as the fund manager sells and adjusts the composition of its ‘basket’), interest and dividends.
5. Managed Funds (aka Mutual Funds).
Pre-dating ETFs, people traditionally invested alongside other investors by putting their money into a managed fund — an unlisted investment vehicle run by an investment firm.
Related: What Is The Average Salary In Australia?)
A professional fund manager uses investors’ collective funds to purchase and manage a grouping of assets with the intent of making strong returns, which all investors receive a share of on a regular basis.
6. Precious Metals.
Gold is known for being a ‘safe-haven’ investment when financial markets are turbulent and inflation is high.
Some people prefer the reassurance of owning physical gold bars, coins and other collectibles or jewellery.
Expert tip.
When you invest your money in actual gold or other precious metals, you own the asset, but you also have to store it and insure it, which adds costs.
The other downside of gold is that it doesn’t generate any returns (unlike dividends from shares, for example) — you only realise profits when you sell it.
(Related: Pros And Cons Of Buying Gold As An Investment).
7. Residential Or Commercial Property.
While housing affordability remains a serious issue in Australia, the residential property market remains an attractive option for some investors due to capital growth in the property’s value and rental income.
Buying physical property also involves covering additional expenses related to its purchase, maintenance and insurance.
Important!
Rental income isn’t guaranteed as values fluctuate, interest rates rise, and offloading a home or office tower is not easy if you need real money fast.
8. Listed Investment Companies/Trusts (LICs/LITs).
Over 100 LICs and LITs are available to buy and sell by investors on the ASX.
Like an ETF, when you buy into an LIC/LIT you derive profits from a basket of underlying securities held and managed by the issuer—in this case, a company or trust.
The ASX advises there are key tax differences between LICs and LITs:
- LIC profits are taxed at the company rate before dividends are paid to investors.
- LITs distribute all net income and realised capital gains on a pre-tax basis, and the investor pays any tax owed.
9. Real Estate Investment Trusts (REITs).
Owning investment property is out of reach for many Australians, but you can benefit from the returns on property through a REIT (also called A-REITs in Australia).
Portfolios of commercial Australian real estate – such as office buildings, retail complexes, shopping centres, and industrial warehouses – underpin REITs.
Important!
When you hold units in a REIT, you get a proportional share of any rental income and realised capital growth through regular distributions from the Trust manager.
10. Derivatives.
More likely to be used by people actively trading the market to make short-term gains, derivatives are a highly risky investment for inexperienced traders.
(Related: Best Investing Apps In Australia).
Derivatives are financial contracts between two parties where profits can be made depending on how an underlying asset or benchmark performs.
For more experienced investors, derivative contracts can mitigate market volatility by hedging your investment.
For example, you can take the opposite position in case the prices of a commodity change in a way that adversely impacts your business.
(Related: Beginner’s Guide To Trading Commodities in Australia).
11. Cryptocurrencies.
Crypto investors include a mix of long-term holders (aka HODLers) and investors seeking to ride the market’s extreme ups and downs to take profits.
The trouble is, the value of different tokens and projects can spike dramatically based on social media hype and people’s fear of missing out (FOMO).
(Related: What Bitcoin Halving Means For Crypto).
Yet, many Australians are excited about crypto and keen to hold some coins — particularly well-known projects like Bitcoin, Ethereum, and Cardano.
Some crypto investors believe digital currencies can provide a powerful buffer against inflationary pressure on fiat currency.
How To Choose The Right Investment Vehicles?
Start by weighing up risks against potential returns to decide on the category of investments that matches your needs.
Unlike gamblers, investors don’t spend money on a whim or a wild guess. Instead, they:
- Research to understand the strengths and weaknesses of an investment, how it works, and the realistic expected returns before you commit.
- Carefully evaluate both the short-term and historical rate of return on different investment types and specific products/funds/assets/properties etc. Use this knowledge to help you decide which investments best cater to your short and long-term financial goals.
Important!
To invest means to take a risk that you’ll lose your capital. However, the type and level of risk vary considerably across and within each type of investment.
For instance, while stocks generally carry a moderate level of risk, not all shares have the same likelihood of good or bad performance:
- Some companies are very large and stable, which hints at reliable returns. However, some high-profile ‘quality’ stocks of a decade ago have since lost share value and market capitalisation due to shifting supply and demand.
- Some companies are untested and unprofitable. They might innovate, expand and grow, making the value of their shares skyrocket—but maybe they won’t.
Expert Tip.
Macroeconomic risks are also an important consideration for any investor—financial markets are affected by changing political and social factors and events that contribute to an unsafe or unstable world.
How Do Investors Create Balanced Portfolios?
In addition to each investment’s likely performance, other factors to consider include:
- Diversification: A core risk management strategy, diversification means including a range of different types of investments and multiple asset types and markets within each type of investment in your portfolio. ETFs and managed funds can be convenient tools for diversification.
- Defensive or Growth: In the interest of having a diverse portfolio that spreads risks, many investors will strive for a balance between defensive investments (that protect capital value with smaller returns) and growth investments (that aim to grow wealth through higher returns).
Important!
The mix of defensive and growth investments investors choose often comes down to their position on the conservative-to-aggressive scale. Seek professional advice to help you decide on your preferences.
- Defensive investments include cash, fixed interest, money market funds, annuities, property and gold. For instance, a conservative investor looking to defend their savings might put their money into a 3-year term deposit.
- Growth investments include stocks, ETFs, managed funds, property and crypto. For instance, a growth-focused investor with a runway of 10 years might invest in an Australian shares ETF with a comparatively higher level of risk but greater opportunity for returns.
What Are The Highest And Lowest Risk Investments?
Risk is somewhat subjective because it depends on an individual’s risk appetite, the time you plan to hold an investment, and the specific product you choose.
You can’t take the general risk level of an investment type at face value. For instance, bonds have a reputation for safety, but the reality is bonds vary widely in risk:
- Government-issued bonds are safer because the government’s default risk (risk of not being able to repay the debt) is extremely low. However, interest rate risk can reduce a bond’s market value, resulting in losses if you sell before the maturity date.
- Conversely, so-called junk bonds have poor credit ratings—indicating their higher risk of default—and as a result, offer much higher interest rate yields as a lure for investors.
Where low-risk options exist, why would an in investor opt for a higher-risk investment?
It all comes back to how much they’re prepared to potentially lose relative to the amount of money they stand to gain.
| Lower Risk Investment Types | Medium Risk Investment Types | High Risk Investment Types |
|---|---|---|
| Bank term deposits | Real estate | Derivatives (CFDs, etc) |
| Australian Treasury bonds | Australian shares | Cryptocurrency |
| Money market funds/ETFs | Global shares | Venture capital/angel investing |
| Annuities | Managed funds | Peer-to-peer lending |
| High-Risk Investment Types | High-yield bonds/debt | Hedge funds/ private equity funds |
Here’s another thing to keep in mind:
- Low-risk investments may be a better option over a shorter timeframe — due to returns being more modest and the risk of inflation devaluing gains. Low-risk investment types are often preferred when returns are less important (i.e., protecting wealth in periods of market downturns rather than growing it).
- Medium and higher-risk investments held for a longer period may offer better returns, provided the investment’s value rises over time despite periods of volatility or market declines. For instance, while shares are reasonably volatile year-to-year, over longer timeframes (decades), the broader Australian share market has delivered average returns around the 9% per annum mark.
Important!
Novice investors seeking to mitigate risks when deciding how to invest money in Australia should consider engaging an expert to help them, such as a qualified and experienced financial adviser from a leading wealth management firm.
Jody
Nelson says:
I attempted to use the “hack” to dodge conversion fees, but sadly after converting AUD to USD on a Wise account, there doesn’t seem to be a way to deposit that money into eToro; i.e. eToro recently disabled Wire transfers and Wise doesn’t support SWIFT transfers for sending USD to a bank in the US?
John Keys says:
CMC Invest are an abysmal in turning around new accounts.
Over 1 month to setup up an account with an investment trust, and still waiting. I was promised 5 business days.
Reg Watson says:
Given that China’s economy is going down the toilet how the heck do we expect an appreciation of the Aussie in 2024 ? We are tied to China.