Understanding The Basics

What is financial planning?

The financial planning process helps you assess your current financial position and assists in identifying your personal and financial goals. A financial adviser can tailor a plan and recommend strategies that will assist in getting you on track to achieving these goals and enjoying the lifestyle you want for you and your family.

Why is a budget so important?

The simple truth is that the only money you're likely to save and invest is the money that you don't spend. But many people only have a vague idea of how much they actually spend. With a budget, you can see exactly where your money goes and how it is being used. This allows you to:

• Identify surplus money that can be used for investing 
• See where your money is being spent, and help you decide whether to continue spending money in the same way, or reduce your out goings and increase your savings 
• Cope with surprise expenses 
• Manage your finances, and give you more confidence in your financial future

What sort of investor am I?

Once you have identified your personal and financial goals, and worked out the amount you have available to invest, you need to know what type of investor you are.
All investments carry some form of risk, and you need to be comfortable with the amount of risk you are willing to take.

Talking to a Financial Adviser is the best way to work out your risk profile but to give you an idea, ask yourself the following questions:

• How much do I need to reach my goals? 
• Do I have a good understanding of the financial markets? 
• What sort of return do I want on my investments - stable, fast-growing etc 
• Am I willing to take a risk to achieve a higher rate of return on my investments?

What's the relationship between risk and return?

Risk and return are closely correlated - higher risk generally means higher returns, while lower risk usually means lower returns. As an investor, this is known as the risk/return trade off.

Understanding risk and return is fundamental to achieving your investment goals. This is because understanding your risk tolerance will decide the type of assets you invest in.

What are asset classes?

Asset classes refer to different types of investments. There are five main asset classes you can invest in - cash, fixed interest, property and shares. The return you achieve, and the level of risk is different with each asset class.

Cash

Cash is the generic term for investments such as short-term bank deposits and treasury notes. Cash is considered the least risky of the major asset classes - generally providing investors with a moderate regular income, but little chance of capital gain.

Fixed Interest

Fixed interest investments, or bonds are effectively loans provided by investors to corporations and government bodies in return for interest payments over the life of the bond. Bonds carry a low to medium risk, and predominantly reward investors with a regular income stream - generally higher than that earned by cash investments.

Property

Property is considered a growth asset, and involves investing in residential or commercial property, or via a listed property trust (LPT). As property is a growth investment, capital gains may be expected over the long term, in addition to ongoing income from rent. Property is considered moderately volatile.

Shares

Shares are securities representing ownership of a company. When you buy a share in a company, you become a joint owner of the business. As a share holder, you may enjoy the company's profit through dividends. You can also sell the shares, hopefully for a capital gain, sometime in the future. Shares are the most volatile of the major asset classes in the short term, but can outperform other asset classes over the longer term.

Managed Funds

Managed funds pool the money of individual investors who share common investment goals. Professional fund managers use the pooled money to buy securities, such as shares, property, fixed interest and cash that are consistent with the fund's financial objective.

One of the biggest benefits of managed fund is that they offer instant diversification of your investment with expert management.
When you invest in a managed fund, you purchase units in that fund.
There are managed funds for virtually every investment objective:

Types of managed funds

• Cash
• Fixed Interest
• Property funds
• Share funds
• Hedge funds
• Multi manager funds

Investing in different asset classes is a good way to reduce risk. By spreading your funds across different asset classes you remove the risk of putting all your eggs in one basket - i.e. the risk that you will choose the wrong asset class at the wrong time.

The highs and lows of market volatility