Steadfast Investment in Volatile Times

With market volatility, investment uncertainty due to geo-political destabilisation around the world, long-term investment planning can cause discomfort for conservative investors. Wealth Creation Specialist Joe Dirani explores the current investment vehicles available in Australia, and says property investment is a safe bet for long-term security.

By Joe Dirani

You can never be too young to start planning for retirement. For those keen to get a head start, we look at six of the main investment vehicles available in Australia today.

Dividend Paying shares

High yielding dividend shares can provide a reliable income from Government bonds.

Historically, Government bonds are safer and when held for a long time, dividend paying shares can deliver decent capital gains.

If you purchased shares in a company at AUD1.00 each and a dividend of 8 cents is paid each year, then you would realise an 8 percent return.

But are there any tax benefits to this investment type?

By attaching franking credits (tax already paid by the business) the company first franks its dividends, and has paid its corporate tax rate, which is around 30 percent on of company profit.

It is then distributed to the remainder to their shareholders.

Australian shareholders receive the credit for the tax the company has previously paid and they are now only required to pay any possible extra in personal tax to match individual tax obligations.

This means that an 8 percent fully franked dividend actually carries a greater after-tax cash flow than an 8 percent return on a term deposit; it carries the franking credits which are used to offset a portion of the investor’s taxable income!

Dividends in shares do not, unlike a term deposit, have a guaranteed return.

There may be a difference between the yield claimed (offset by a poor year) so the distribution of income to shareholders may be lower than the announced yield.

Some investors may opt to invest in well-established, and what is classified as ‘defensive stock investment’ companies such as Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corp etc.

Cash Saving

With low interest rates at the moment, this old staple can still be used for initial long term wealth creation. The downside is a low return which is inversely proportional to risk.

In Australia, there is a tiny chance that banks will be rushed for mass withdrawals due to its fairly strong economy and tight banking regulations. Cash assets, such as savings accounts and term deposits, are the most liquid of all the asset classes.

In Australia, cash has averaged a 3.1 percent return per annum over 10 years.

Bonds

Fixed income assets, such as Government and corporate bonds are seen as providing a form of stable and reliable returns.

When purchasing a Government bond, you are essentially lending money to the Government which it will pay you back with interest.

This interest is paid to you in regular instalments throughout the length of the bond.

Debenture

A debenture is a promise made by an entity to repay money that has been lent to an entity.

An investor provides loan funds to the issuer, and in return the person borrowing the funds issues a debenture with a promise to pay a rate of interest for a set period. And then repay the loan.

Debentures may also be referred to as unsecured notes and may be listed on the stock exchange or unlisted.

Managed Investment Scheme

Your money is pooled with other investors to buy assets. You acquire interest in the scheme as opposed to shares.

The number of units you receive depends on how much you invest in the scheme.

Other terms for this form of investments are managed funds, unit trusts, managed trusts, investment trusts, pooled funds, collective investments and investment funds.

Property

While a mix of the above all may help an investor achieve a balanced investment portfolio, property is still a viable long-term wealth creation solution whether you’re a conservative or aggressive investor.

Being a tangible asset, it is less exposed to extreme market volatility. Australia has enjoyed quite a sustained, long-term growth property market over the past three decades and it doesn’t seem to be changing anytime soon. After talking with numerous experienced investors and seeing the population projections for the future, all around Australia, strong rental demand and the depth of capital investment by overseas investors, suggests that property still remains a steadfast performer. Have a chat with your local financial advisor to discuss your options.

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