Discover Your Investment Options

When starting out in the world of investing, it is important to understand the different types of investments available.

Discover Your Investment Options

 Article Last Updated: 29 December 2021

Five different pggy banks, indicating a diverse share portfolio
Image Source: Getty Images

People seeking to invest have a wide range of options to choose from. There are many types of investments that can provide varying returns over time. Different investment strategies also come with varying characteristics and risk profiles. This means that certain types of investments may better suit specific investors, depending on their stage of life and risk tolerance. Many investors choose to invest in a range of investment classes, and a variety of investments within each class. For example, an investor may own multiple ASX shares as well as other investments such as property or bonds.

Types of investments

When starting out in the world of investing, it is important to understand the different types of investments available. Investments can be broadly separated into the following classes: 

  • Australian shares: Shares represent part ownership of a company. When you buy shares in companies traded on the Australian Securities Exchange (ASX), you are entitled to receive any dividends those companies may distribute. You will also benefit from capital gains if the prices of the shares you own increase over time 
  • Global shares: There are multiple share exchanges across the world. The ASX represents just a small percentage of the universe of investable shares. Many investors like to seek global exposure through investing in shares traded on exchanges such as the NASDAQ, New York Stock Exchange (NYSE), and other global stock exchanges 
  • Property: This can be residential, commercial, or industrial in nature. A property investment could be in the form of bricks and mortar assets, like your home or an investment property. It’s also possible to gain exposure to property by buying units (or shares) in real estate investment trusts (REITs). REITs are organisations that own and operate income-producing properties, such as office buildings and shopping centres. They aim to increase the value of their property assets as well as generate rental income, part of which is usually distributed to their securityholders
  • Fixed interest: Also known as bonds, fixed interest securities represent a loan made by the investor to the bond issuer (which could be a company or government). Fixed interest securities give investors the right to interest payments, which may be fixed or variable, and to repayment of the principal at the bond’s maturity date. Like shares, bonds are traded on bond markets globally
  • Cash: This can be cash in the bank or actual physical cash. With interest rates at record low levels, many investors are looking to alternative asset classes given the current poor returns on cash investments such as term deposits
  • Gold: This precious metal has been used as a store of wealth for centuries.  The gold price is negatively correlated with that of other financial assets, so it is often used to diversify portfolios and provide a hedge against inflation and uncertainty 
  • Cryptocurrencies: They’re a relative newcomer to investment portfolios, and are yet to achieve truly mainstream acceptance. A high risk asset class, cryptocurrency prices can be extremely volatile, meaning they may not be suitable for all investors. 

These investment classes each have different characteristics and, as such, will suit different categories of investors with varying risk profiles. It is important to understand your investment options so you can select the investment types most likely to help you achieve your financial goals. 

Shares (whether Australian or global) are seen as a higher risk investment, suiting investors with longer term time horizons. This is because over the short term, share prices can be volatile. Over the longer term, however, shares tend to provide a higher return than lower risk investments, such as cash. 

Fixed interest securities are lower risk than shares, but still entail some capital risk, as the price of bonds can fluctuate with interest rate and credit risk changes. The payments received by bondholders may also change if the bonds have a variable interest rate. 

Property is generally considered a longer term investment. Partly, this is because there can be high entry and exit costs to property investment. When buying bricks and mortar property, investors must also consider the costs of stamp duty, conveyancing, and other buying and selling costs, which can be substantial. 

This is far less of a problem when investing in property via REITs, units of which can be bought and sold on the ASX like other shares. Nonetheless, these trusts tend to give exposure to commercial or industrial property rather than residential property.

Defensive or Growth

Different types of investments can be classified as defensive or growth investments. Defensive investments tend to be more stable and less likely to lose money, however returns on defensive investments tend to be lower over time. Growth investments have higher expected returns, but the risks of losing money can also be greater, especially over the short term. 

Defensive investments tend to pay fixed returns, whereas the returns from growth investments (such as dividends from shares) can grow over time. 

Let’s take a look at some characteristics of these different types of investments:

Asset Class Asset Type Time Frame Risk Level
Australian Shares Growth 5 - 7 years High
Global Shares Growth 5 - 7 years High
Property Growth/Defensive 5 -10 years Medium
Fixed Interest Defensive 1 - 3 years Medium
Cash Defensive 0 - 3 years Low
Gold Defensive 1 - 10 years Medium
Cryptocurrency Growth 1 - 3 years High

 

As you can see, different types of investments suit different time horizons and risk profiles. Cash and fixed interest are the most common defensive investments. This is because they involve a commitment to return capital to the investor at a certain point in time. 

Shares are the most common type of growth investment, as shares can pay dividends and appreciate in value over time. Having said that, shares themselves also offer a wide variety of choice for investors with differing risk appetites and expectations of returns. For advice on how to decide which shares to buy, read our article here

Property can combine aspects of both growth and defensive investments. It can provide a stream of rental income, while also potentially increasing in value over time.

Australian shares

Investors have a wide variety of choices when investing in Australian shares. There are more than 2,000 companies listed on the ASX, which means there is something suitable for all types of investors. From big name companies like Rio Tinto Limited (ASX: RIO) and Commonwealth Bank of Australia (ASX: CBA) to a wealth of small-cap growth shares, the ASX contains a vast array of investment opportunities. 

Some investors enjoy researching individual ASX shares and taking a position in those they see as promising. Others are simply seeking exposure to the market more broadly. For the latter, there are a variety of exchange-traded funds (ETFs) available that aim to deliver similar returns to the wider ASX or specific sectors of the market. 

Companies listed on the ASX operate across a diverse range of industries, including mining, retailing, financing, technology, health care, and manufacturing. Most Australians will have some exposure to ASX shares via their superannuation funds, but many are also choosing to invest on their own to help achieve their financial goals. 

For investors who are just starting out, it is essential to remember that Australian shares are generally a longer term investment and share prices fluctuate day to day. This is one of the reasons why it’s so important to diversify by spreading your investments across multiple types of shares. It’s the ‘don’t put all your eggs in 1 basket’ principle.

Global Shares

Australian investors also have the option to invest in global companies like Apple Inc (NASDAQ: AAPL) and Google owner Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL). This can be done directly using online brokerages, or via ETFs traded on the ASX. 

Investing in global shares offers diversification benefits by giving investors access to the performance of companies worldwide. Many of the world’s best companies are listed on stock exchanges outside Australia, so limiting your investment universe to Australia means you would miss out on exposure to them. 

Investing globally also provides geographical diversification, providing exposure to industries that are underrepresented in Australia. Diversification can help reduce losses in bad times and provide more opportunities to benefit in good times.

Different Types of Shares

There are different types of shares traded on the ASX and other global stock exchanges. The majority of traded shares are known as ordinary shares, which carry no special rights. Ordinary shareholders generally have the right to vote at a general meeting of shareholders, receive dividends, and share in any distribution of assets in the event that the company is wound up. 

Preference shares, on the other hand, give holders first priority to dividends, as well as any distributions upon the winding up of a company. Contributing shares (also known as partly-paid shares) are issued without the company requiring payment of the full issue price. The company is then entitled to call for the outstanding part of the issue price to be paid at a later date (or dates).  

Investors can also purchase options over shares. Options allow the holder to either buy or sell shares in a company at a certain price within a certain time frame. A call option allows the holder to buy shares at a specified price within the specified time frame. A put option allows the holder to sell shares at the specified price within the specified time frame. 

The price of an option will depend on the price of the underlying share. Options can be used both to speculate on price movements and to hedge against existing positions. Options can, however, be high risk, so they are not usually recommended for beginner investors.

Gold 

Gold is a precious metal that has been prized by civilisations for many thousands of years. Not just a material for jewellery-making, gold has a rich history, having first been used as a form of currency more than 2,500 years ago. 

Gold was used to back the United States (US) currency until the 1970s, and while this is no longer the case, it still plays an important role in the global economy. Many central banks hold significant supplies of gold, which can be used to hedge against both inflation and deflation risks. Gold has a history of holding its value, while the same cannot necessarily be said about paper currencies.

Gold is seen as a defensive asset that can provide important diversification benefits within a portfolio. This is because gold prices have traditionally been negatively correlated with prices of financial assets such as shares. Gold tends to perform well when the share market is performing poorly, and vice versa. 

The inclusion of gold in an investment portfolio can therefore reduce the overall volatility and risk of the portfolio. Gold can be seen as a safe haven that provides protection during times of political and economic uncertainty. For example, when COVID-19 emerged in early 2020, the S&P/ASX 200 index (ASX: XJO) fell 32.5% in a month. The gold price, on the other hand, surged 38% between March and August 2020.  

Investing in gold doesn’t necessarily require buying physical gold and storing bullion in a safe, although this is an option. Exposure to the diversification benefits of gold can be gained through gold-focused ETFs as well as by holding shares in companies engaged in gold mining. 

Investing in gold via an ETF or listed gold company means you can add gold to your portfolio using your usual brokerage account. You can also gain exposure to gold by investing in gold options or futures contracts

Cryptocurrencies 

Cryptocurrencies are an emerging asset class that only originated in the 2000s. Built using blockchain technology, the cryptocurrency market has boomed in recent years with some 10,000 cryptocurrencies now in existence. This compares to approximately 180 traditional currencies. 

Cryptocurrency was invented as an internet cash system which allows people to transact with each other without a third party, such as a central bank, to verify the transaction. Verification is instead performed by the blockchain technology that underlies cryptocurrencies. Today, however, many people see cryptocurrencies as an investment opportunity and alternative asset class. 

Governments around the world have taken different approaches to the emergence of cryptocurrencies. While some countries (such as China) have tried to ban the use of certain cryptocurrencies, others (such as the US) have sought to regulate the sector. Australia considers cryptocurrency neither money nor a foreign currency, although the Australian Taxation Office has ruled that it is an asset for capital gains tax purposes. 

Investment in cryptocurrencies can, however, be highly risky given their inherent volatility. They are prone to sudden crashes in value, and liquidity can be limited. Large investors in cryptocurrencies can cause rapid declines in value should they choose to exit, which means market risk is a real concern for ordinary investors. 

Those wanting to invest in cryptocurrencies have a number of options. They can invest directly using a cryptocurrency exchange to purchase specific cryptocurrencies, but they should also be able to gain exposure through ETFs listed on the ASX in the near future. 

In late 2021, the Australian Securities and Investments Commission (ASIC) released a set of best practice guidelines that fund issuers must satisfy when offering cryptocurrency ETFs. A number of ETF issuers are understood to have cryptocurrency products in the pipeline, which means investors may soon be able to gain exposure to this asset class using their regular brokerage accounts. 

How to decide which investment options suit you

So how do you choose your investments? Firstly, you need to understand your financial goals and time horizon. Secondly, you need to understand your investment options. 

As discussed, different types of investments will suit different people depending on their risk tolerance, desired returns, and willingness to pay any costs associated with the investment. For a risk-averse investor interested in achieving some income whilst preserving their capital, fixed interest investments may be appropriate. For someone with a long time horizon and high risk tolerance who is looking for growth, global or ASX shares may be more appropriate investment options. 

Taking the time to properly research the different types of investments available to you will help set you up for investing success. Remember to spread your investments across different asset classes and different assets within classes. This will reduce the risk of your overall investment portfolio and provide you with more opportunities to benefit when things go well.

 

Figures correct at 29 December 2021. Kate O'Brien contributed to this report and on 29 December 2021 owns shares of Alphabet (A shares) and Apple. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Alphabet (A shares). The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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