People seeking to invest have a wide range of options. Many types of investments can provide varying returns over time.
Different investment strategies also come with various characteristics and risk profiles.
This means certain types of investments better suit specific investors, depending on their financial situation and risk tolerance. Many investors choose to invest in a range of investment classes and various investments within each category. This is known as asset allocation.
For example, an investor may own multiple ASX shares and other assets such as property or bonds.
Types of investments
When starting out investing, it is important to understand the different investment options. We can broadly separate investments into the following classes:
Australian shares: ASX shares or stocks represent part ownership of a company. When you buy an Australian share in a company traded on the Australian Securities Exchange (ASX), you are entitled to receive any dividends the company distributes. You may also benefit from capital growth if the share prices increase over time.
Global shares: There are multiple share exchanges worldwide. The ASX represents a small percentage of the universe of investable shares. Many investors seek global exposure by investing in US shares traded on exchanges such as the NASDAQ, New York Stock Exchange (NYSE), and other international stock exchanges.
Property: This can be residential, commercial, or industrial. Property investing can be in bricks and mortar assets, like your home or investment property. It's also possible to gain exposure to property by buying units (or shares) in real estate investment trusts (REITs). REITs own and operate income-producing properties, such as office buildings and shopping centres. They aim to distribute returns to their security holders through rental income and increasing the value of their property assets.
Fixed interest securities: 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 – whether fixed or variable – and to repay the principal at the bonds' maturity date. Like shares, bonds are traded on bond markets globally.
Cash: This can be cash in the bank or actual physical cash. Although interest rates are rising, many investors are bypassing the term deposit, looking to alternative asset classes given the current poor returns on cash investments such as term deposits.
Gold: People have used this precious metal as a store of wealth for centuries. The gold price negatively correlates with other financial assets, so investors often use it to diversify portfolios and provide a hedge against inflation and uncertainty
Cryptocurrency: A relative newcomer to investment portfolios, cryptocurrency has yet to achieve true mainstream acceptance. This is a high-risk asset class where crypto prices can be highly volatile, which may not be suitable for all investors.
Which categories will suit you?
These investment products each have different characteristics and, as such, will attract different types of investors with varying risk profiles. Understanding the investment options available is essential to select the investment strategy most likely to help you achieve your financial goals.
Shares (Australian or global) are considered a higher risk, 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 investment 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. Investment earnings may also change if the bonds have a variable interest rate.
Australian property is generally considered a longer-term investment. Partly, this is because property investment can have high entry and exit costs. When buying bricks and mortar property, investors must also consider the charges 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?
We can classify different types of investments as defensive or growth investments. A defensive investment option tends to be more stable and less likely to lose money. However, returns on defensive investments tend to be lower over time. Defensive investment options include products like bonds and term deposits.
Growth investments have higher expected returns, but the risk of losing money can also be greater, especially over the short term. Growth investments include Australian equity, as well as international shares or overseas shares.
Defensive investments tend to pay fixed returns, whereas the returns from growth investments (such as share dividends) can grow over time.
Let's take a look at some characteristics of different investment types:
|Asset class||Asset type||Timeframe||Risk level|
|Australian shares||Growth||5–7 years||High|
|Global shares||Growth||5–7 years||High|
|Fixed interest||Defensive||1–3 years||Medium|
As you can see, different investing strategies suit a variety of 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 choices for investors with different risk appetites and expectations of returns. For advice on deciding which shares to buy, read our article here.
Property can combine aspects of both growth and defensive investments. It can provide a rental income stream while potentially increasing value over time.
Investors have a great deal of choice when investing in Australian shares. With more than 2,000 companies listed on the ASX and 11 major market sectors, there is something suitable for all investors. The ASX contains investment opportunities ranging from big-name companies like BHP Group Ltd (ASX: BHP) and Commonwealth Bank of Australia (ASX: CBA) to a wealth of small-cap growth shares.
Some investors enjoy researching individual ASX shares and taking positions in those they see as promising. Others are simply seeking exposure to the market more broadly. Various exchange-traded funds (ETFs) are available for the latter to deliver similar returns to the wider ASX or specific market sectors.
Companies listed on the ASX operate across diverse industries, including mining, retailing, financing, technology, healthcare, and manufacturing.
Most Australians will have some exposure to ASX shares via their superannuation funds. But, many choose to invest independently to help achieve their financial goals.
For investors just starting, it is essential to remember that Australian shares are typically a longer-term investment and share prices fluctuate daily. This is one of the reasons it's so important to diversify by spreading your investments across multiple types of shares. The 'don't put all your eggs in one basket' principle plays an essential role in returns from investment markets.
Australian investors also have the option to invest in international companies like Apple Inc (NASDAQ: AAPL) and Google owner Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL). You can do this directly using online brokerages or via ETFs traded on the ASX. Overseas shares are often high-growth assets but can include a significant component of investment risk.
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 underrepresented industries in Australia. Diversification can help reduce losses and provide more opportunities to benefit in good times.
Other types of shares
There are different types of shares traded on the ASX and other global stock exchanges. Most traded shares are known as ordinary shares, which carry no special rights. Ordinary shareholders generally have the right to vote at a general meeting, receive dividends, and share in any assets distributed if the company winds up.
Preference shares, on the other hand, give holders first priority to dividends and 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 later.
Investors can also purchase options over shares. Options allow the holder to buy or sell company shares at a specific price within a certain timeframe. A call option allows the holder to purchase shares at a specified price within the specified timeframe. A put option allows the holder to sell shares at the set price within the specified timeframe.
The cost of an option will depend on the price of the underlying asset. Investors can use options 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 is a precious metal that civilisations have prized for thousands of years. With a rich history as a material used to make jewellery, gold has also been a currency for more than 2,500 years.
Gold backed the United States currency until the 1970s, and while this is no longer the case, it still plays a vital role in the global economy. Many central banks hold significant supplies of gold, which they can use to hedge against inflation and deflation risks. In addition, gold has a history of holding its value, while the same does not necessarily apply to paper currencies.
Gold is also seen as a defensive asset that can provide significant 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 performs poorly, and vice versa.
The original safe-haven
Including gold in an investment portfolio can reduce overall risk and volatility. Gold is seen as a safe-haven asset that protects during 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 still an option. We can gain exposure to the diversification benefits of gold through gold-focused ETFs or managed investments and 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.
A high-risk asset class, cryptocurrencies originated in the 2000s. The cryptocurrency market has become more mainstream in recent years, with some 10,000 cryptocurrencies in existence at its peak. This compares to approximately 180 traditional fiat currencies.
Once touted as a possible safe-haven asset akin to gold, cryptocurrencies such as the original Bitcoin (CRYPTO: BTC) have lost some of their gloss lately, with crypto prices starting to fall towards the end of 2021. Many investors bailed out or were burned by the industry when crypto giant FTX and several other operators collapsed in 2022, causing trillions in losses.
Cryptocurrency is built using blockchain technology. It was invented as an internet cash system that allowed people to transact with each other without a third party such as a central bank, to verify the transaction. Instead, the blockchain technology that underlies cryptocurrencies performs the verification.
While some still see cryptocurrencies as an investment opportunity and alternative asset class, such investments can be highly risky, given their inherent volatility. They are prone to sudden crashes in value, and liquidity can be limited. Prominent investors in cryptocurrencies can cause rapid declines in value should they choose to exit, which means market risk is a genuine concern for ordinary investors.
Governments around the world have taken different approaches to the emergence of cryptocurrencies. While some countries (such as China) have tried to ban 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.
Those wanting to invest in cryptocurrencies have several options. They can invest directly using a cryptocurrency exchange to purchase specific cryptocurrencies, utilise a managed fund, or gain exposure through ETFs listed on the ASX, such as the BetaShares Crypto Innovators ETF (ASX: CRYP).
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.
How to decide which investment options suit you
So, how do you make your investment decision? Firstly, you need to understand your financial goals and investment 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 investment fees.
Fixed-interest investments may be appropriate for a risk-averse investor interested in achieving income while preserving their capital. Global or ASX shares may be more appropriate investment options for someone with a long time horizon and high-risk tolerance looking for growth.
Researching the different types of investments available to you will help set you up for investing success. Remember to spread your investments across asset classes and assets within classes. This will reduce the risk of your overall investment portfolio and give you more opportunities to benefit when things go well.