Is This The King of Investment Classes?
As the end of the financial year wrapped up, financial planners throughout all of Australia were busily reporting on the investment returns they’d achieved for their clients, and projecting their expectations for the next 12-60 months.
The vast majority of financial planners DO tend to stick with only a small range of investment classes – and these are not necessarily the best performing. They’re simply the asset classes and investment options that they UNDERSTAND.
One of the key measures that smart financial planners use is the Internal Rate of Return, or IRR for short.
What that refers to is the compound return on equity you can expect averaged out over the lifetime of the investment.
And the returns that are projected are routinely based on YOUR risk profile (by law, your financial planner needs to gather sufficient information about your attitude towards risk, before he/she can begin to make investment recommendations).
Typical returns for your average investor, project an IRR around 7% for the next 5 years, depending on how aggressively you chase the returns. That means getting 7% ROI, compounding each year.
7% may not sound like a lot, but it’s certainly the norm for many asset classes.
However, there’s another asset class that absolutely dwarfs these returns, making it Australia’s asset class of choice.
That’s (obviously): PROPERTY.
Although property has only historically increased at between 7-10% per year over the long term (although, many are predicting that to slow considerably now), the key factor in increasing returns through property has been leverage.
Banks are quite happy to lend, in some markets and at some times, up to 106% of the purchase price of a property. In the current market, 90% seems fairly achievable, depending on your circumstances. That means, your money can be working VERY hard for you, and in terms or pure IRR, the returns can push well above 20%.
You can also leverage with shares, by borrowing against your position to purchase more shares. But this can be highly risky. Share prices are generally a lot more volatile than property prices, and fluctuate daily. If the shares you’ve invested in have a strong, long-term outlook, your gains can be entirely wiped out by a temporary drop in the market that can push their value so low that the bank has to call in the loan and you can potentially lose everything.
So, when it comes to investment, the best advice is to have a financial planner who understands more than one asset class and can advise you on a broader ranger of options. And can help you create a wealth plan specific to you.
If you’d like to speak to us about how we might specifically be able to help you understand which investment classes might suit your investment portfolio and risk profile, we really need to hear from you.
Call 1300 878 898 to get expert advice now.