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Investment and wealth creation options

Last Updated at April 13th 2022
Investing your money is one option to grow your retirement savings but you need to make sure your approach is right to help you build your nest egg.

Key points:

  • It can be important to build up a good nest egg for your retirement
  • There are four common investment types you should be aware of
  • You don't have to stick to common investment types, there are many investment opportunities available that may suit your needs
  • Goal setting can be a vital part of investing and growing your wealth
Goal setting for investment and building your nest egg
Four common investment types that can help build a great financial future for you and your family. [Source: Shutterstock]

Building a good nest egg

With hundreds of investment options available to you, it can be difficult to provide a list of the best options. The most beneficial options will also depend on your personal circumstance, from the income you earn to the debts you have or even your medical costs if they are significant.

You may have specific ideas about where you would like to invest your money, such as shares or property, but it's a good idea to engage a financial planner to help you understand the risks involved as well as making sure it's an option that suits your financial goals.

Wealth creation, or investing, may be able to help you to reach these goals by growing the income you earn while working so that you have more than just your income savings when you retire. Continuing wealth creation after you retire, by staying on top of the returns your investments are bringing, can add to the money you have available and stretch it out over more years.

The basic four common investment types

There are generally four classes of investments, each has a number of types of investments in the class:

  • Stocks

You invest in stocks by buying part of a company, also called purchasing shares, and as the company grows using your investment, the value of your stocks increase. To make money off of your original investment you sell the shares when they are worth more than you paid for them.

The risk with stocks is that there is no guarantee that they will go up in value and they could actually be worth less than you paid when you need to sell them, or the company could fold, meaning you could lose money. However, there is the chance that you could sell stocks for a lot more than what you paid if you sell at the right time. This requires monitoring on your part to know when is a good time to sell.

The two different types of stocks are common stock, which provides you with a vote per stock on who the board members of the company are, and preferred stock, which doesn’t give you a vote but does entitle you to priority dividend payments.

Dividends are paid out to investors quarterly by the company, to both common shareholders and preferred shareholders, however, preferred shareholders will usually receive a standard amount from dividends, whereas common shareholders may have varied payouts.

  • Bonds

Bonds are similar to a loan in which you invest in an organisation, which could be a business or government entity, and they promise to pay you back by a specific date. Your investment is used by the organisation to finance projects which require more money than a bank would loan. The entity which you enter into a bond with will pay you an agreed variable or fixed interest rate until they pay back your investment.

Bonds have a lower risk than stocks, but also have a lower return. They are usually long term investments, but can be shorter depending on the bond agreement you have.

The main risk of a bond is that a company with a lower credit rating, which is less trusted, is more likely to go under and not be able to pay back your bond, so these investments look more attractive because they will provide you with higher interest payments. You also can’t choose to get your bond back whenever you want and have to wait until the organisation returns your investment.

In Australia, the types of bonds are corporate bonds, with companies, Treasury Bonds, which are fixed rate Government bonds, and Treasury Indexed Bonds, which are Government bonds linked to the Consumer Price Index (CPI).

  • Funds

Funds are arrangements where you pool your money with other people’s investments to buy assets including stocks and bonds. The fund is managed by a finance professional who is in control of distributing your and other investors’ money.

One benefit is that your investment is professionally managed, and that it can be invested in a wide range of ways, however because you are part of a group everyone shares in the losses and gains.

  • Cash equivalents

Cash equivalents are assets offered for purchase by companies, which are easily convertible to cash, such as commercial papers, marketable securities and short-term government bonds.

This type of investment can be shorter term, providing return within three months, and does not fluctuate in the same way as stocks and bonds, making it low-risk. It is usually a sign that a company is strong if it can offer cash equivalents.

However, cash equivalents are unlikely to give you a high return.

Other investment opportunities you may hear of

Other types of investments include commodities - goods which people buy and sell such as wheat, coal and gold - term deposits where you put money into a bank account to earn interest for a certain amount of time, and real estate or property investment.

Commodities tend to be riskier investments as prices fluctuate wildly, although gold and silver tend to be stable. However, you can choose for these to be short term or long term investments.

Term deposits in bank accounts may not produce high returns, as this depends on interest rates, and you can't access your money until the term is up. So if you have a five year term deposit and you need more money, you won't be able to withdraw your deposit. But this is a stable way to collect interest and you will never end up with less money than you put in as a deposit, making it low risk.

Properties can only be long term investments, but also come with tax benefits and a good record of long term growth. Diversifying your investment portfolio across asset classes can give you more security if one of your investments doesn’t have returns which are as strong as you were expecting.

The importance of goal setting – the Big Five

Goal setting is an important step before you jump into investing or look into wealth creation, as you want the options which you use to give you the returns which will achieve your goals. Goals which you set can be formed into a good financial retirement plan, which is vital when investing.

There are five key areas to focus on when goal setting and planning for retirement:

  1. Time until retirement - what age do you want to be when retired, as this will impact how many years you need to plan to fund yourself for
  2. Required budget during retirement - include costs like everyday living expenses, medical expenses, extras for care to support you to live independently at home and any large purchases you are planning such as a new car or caravan
  3. Current financial situation - risks and liabilities such as debts or loans
  4. Insurance and ongoing costs - your insurance costs don’t stop when you retires, so consider how much you will need to pay for life, house, vehicle and other insurances
  5. Your lifestyle requirements - the kind of lifestyle which you want to have after you retire, usually labelled as modest or comfortable unless you rely on the pension, which is labelled as surviving

Financial advisors provide options, advice, and investment strategies depending on how it will benefit you personally in the short and long term and can help you to work through retirement planning. They are required to act in your best interest as per the Financial Adviser Standards and Ethics Authority guidelines, so will provide you with the best options.

Call 1300 863 216 to talk to an accredited financial advisor today or search for financial advisors near you.

Disclaimer: The information on this site is general in nature and does not constitute legal or financial advice. Readers should seek their own personal legal and financial advice from a suitably qualified practitioner.

What investment options are you considering to grow your retirement wealth? Tell us in the comments below.

Related content:

How do financial advisors help with retirement planning?
What to consider when choosing a super fund
Age Pension and planning your retirement

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