INVESTING- IN

VESTMEN

T

PLANNING

Year

10 Commerc

e

selecting a mix of investments spreading the risk

maintaining records and monitoring investments

modifying investments to maximise long-term gains

SYLLABUS

SELECTIN

G A MIX OF

INVESTMENTS

Having different types of investments, not just one, can help you reduce the risk of any profits you may have built up over time getting washed away by the changing tide of economic news and market sentiment.

HOW TO PLANEffective investors plan their investments

rather than act on whims and intuition. Where to invest depends on three main factors:

• the goals of the investor• the time period being considered for the

investments• the risk tolerance of the investor.After considering these factors an investment

portfolio can be established.

THINGS TO KNOW• The first thing you need to know is that

there are basically two types of investment – debt and equity.

• If you’re planning to invest, you should understand the difference

• The second thing is that no single investment is likely to meet all your needs. You’re better off having a mix of investments that work together as a team.

• The trick, of course, is getting the right mix to match your needs and the risks you’re comfortable with

• A diverse investment portfolio (collection of investments) allows a mix of high risk and low risk ventures and ventures with high and low liquidity.

• This ensures that you can safeguard your money and enables you to tie up your money in one area but have another, accessible fund elsewhere.

DIVERSITY

INVESTMENT PLANNING SCENARIOSScenario One: Young And Single• Young, single investors usually have short-term

goals, such as buying a car.• The emphasis would probably be towards the less

risky investments of cash and fixed interest. • When investors buy their first home, it provides an

entry to the property market. • After short-term goals are met, and with retirement

in mind, the investor may then place emphasis on shares.

• Shares are often seen to be the most appropriate form of investment when considering the long term.

INVESTMENT PLANNING SCENARIOSScenario Two: Married With Children• When investors become parents, the

cost of educating their children may be a consideration.

• The family would also need to continue investing for retirement.

• Therefore less of the investment portfolio is likely to be in cash and fixed interest with most of the investments in property and shares.

• If the children were to attend private schools, a more evenly balanced portfolio might be considered to allow ready access to funds to pay school fees each year.

INVESTMENT PLANNING SCENARIOSScenario Three: Approaching

Retirement• As investors approach retirement, less

risky investments may be desired in order to protect funds from a sudden downturn in a particular market.

HOW DO YOU CHOOSE?

PERSONAL FACTORS ….such as your age, earning capacity and

your personal preferences. Younger investors are more likely to consider long-term investments because they have time to wait for the investment to mature.

Investors who are close to retirement who may look to getting a quicker return.

Younger investors can also afford to take more risks as they have a longer working life and therefore more income opportunities ahead of them.

EARNING CAPACITY …may also affect how much you can invest and the degree of risk you may be willing to take.

Low-income earners, for example, would be better off starting with secure investments so that there is less risk that they lose the little they do own.

High-income earners may be willing to take more of a risk because they have the earning capacity to cover their losses.

PERSONAL POLITICS AND PREFERENCES ……will also influence investment

decisions. Ethical investment, politics could affect where an investor prefers to invest.

Personality will influence the degree of risk they are likely to take.

Many people often set personal rules taking into account these considerations, so their tenacity and discipline in following their rules will also affect where they are likely to outlay money

SOURCES OF ADVICE• Despite heavy regulation, the finance industry has its fair

share of unethical, and sometimes illegal, operators. • An investor must learn to identify a source they can

understand and trust before they invest.• The media, including newspapers and other publications,

provide current news on financial events that you can use to research market trends and opportunities.

• Most newspapers have a finance or business section, while some financiers prefer specialist publications, such as the Australian Financial Review.

• There are also a number of credible online sources that report on the industry, though you must use your judgement to determine which sources are trustworthy.

ADVISING BODIESFinancial institutions provide advice on

investments that they offer. If you shop around and ask questions, you can compare different products from a range of providers. Institutions with this information include any company that provides these investment products, such as banks, building societies, credit unions or insurance companies.

ADVISING BODIESA number of people who work in the industry

can also help you make informed investment decisions.

As well as investment advisers who work for financial institutions, you can obtain advice about shares from stockbrokers and other kinds of advice from independent financial planners.

Make sure your adviser has an Australian Securities & Investment Commission (ASIC) licence before asking for their advice.

RESEARCHin order to evaluate an investment option,

you need to conduct research or have someone with expertise research it for you.

This may include looking at the investment history (such as returns from previous years) or at the company's annual report if your investment involves a business.

This allows you to make sure you understand the terms and conditions of the investment.

RESEARCHYou must also consider where your outlay

will go and how it will be used in order to understand how it will earn money.

The level of research required will also influence any decision to invest.

Investors who are interested in and willing to examine the finer details of the economy are more likely to outlay money for complex investments than those who are unwilling to make the effort.

It may therefore follow that the convenience and simplicity of an investment strategy will affect an investor's decision to outlay money.

RESPONSIBLE ADVICE1. A responsible adviser will gather as much information

about you as possible in order to ascertain which investment may suit you and your situation.

2. They should determine your financial position by taking into account your income, assets, debts and financial commitments and then speak to you directly about your investment objectives.

3. They should also take into account your personality and assess your risk tolerance.

4. After they create a plan for you,5. They should follow up by reviewing and altering the

plan regularly according to the market and any change in your circumstances.

6. Any information that you disclose to an adviser should remain confidential.

ASSOCIATED COSTSTaxes, fees and inflation will affect the

rate of return. The government considers investments a

form of income, so you will need to factor in that you will pay tax on the return, which would affect the amount you actually receive.

FEESInvestors may have to pay a fee or a

commission to enter or exit an investment, or access financial expertise.

Some investments have fees for administering your investments, for example, share trading often attracts a brokerage, usually a small percentage of the trade you make.

REGULATORY STATUTESThe law is designed to protect investors

from unscrupulous operators in the finance industry, particularly investors who do not have the education or qualifications to understand the industry. Because of the complex nature of the economy, it is easy to mislead investors who are not professionally involved in finance. As such, laws pertaining to providers and advisory services ensure that providers in the industry are held accountable for the advice dispensed.

REGULATORY STATUTES

The Corporations Act 2001 (Cth) is a statute that applies to all corporations, including those that provide financial products and services. It sets legal boundaries with regard to the assumptions that consumer can make about a company's compliance with the law, including assumptions relating to the legality of the financial product and the qualifications of the advisers. The Corporations Act also deals with false and misleading advertising of products.

REGULATORY BODIES• Under the Financial Services Reform Act 2001 (Cth),

all financial planners must attain a licence from ASIC (Australia Securities and Investments Commission ), ensures that the adviser must maintain a standard of service that includes proper training of staff, ethical conduct and adequate complaint-handling procedures.

• If a company chooses, they can obtain voluntary membership to organisations, such as the Financial Planning Association of Australia (FPA), that have a separate code of ethics and additional rules of professional conduct.

FINANCIAL SERVICES GUIDE• Financial service providers are required

to disclose as much information as relevant to the service they provide

• They must issue a financial services guide (FSG) that explains: the services they offer, how they operate, and how they deal with customer complaints. reveal anything that could influence their advice, such as their associations, their source of income and any commissions they receive.

PRODUCT DISCLOSURE STATEMENTIn addition to a FSG, an adviser is obliged, by the

Financial Services Reform Act 2001 (Cth), to provide you with a product disclosure statement (PDS).

This contains details of: the product, all costs and fees, including commissions, all the risks associated with the investment plus any other information relevant to the advice. This document will also specify your legal right to

proper complaints handling and the applicable cooling-off period.

COOLING OFF PERIODSA cooling-off period lasts for 14 days, starting from when

you receive written confirmation of the investment or at the end of the fifth day following the date of issue.

You must notify the issuer in writing, within the cooling-off period, if you wish to withdraw or cancel your investment.

You are entitled to a refund that may or may not be subject to administration charges or affected by market changes.

You may also cancel or withdraw after this time, subject to penalties set by the financial adviser.

MAINTAINING RECORDS

AND MONITORING

INVESTMENTS

RECORD KEEPING • To effectively manage an investment portfolio, all

costs of the investments and their sources of income would need to be recorded, along with other relevant information, such as the dates the investments were acquired and how much of each investment has been bought, sold and is currently held.

• The most difficult part is recording returns on the investments owned.

• Basic market information is required to assess returns on investment, such as prices of shares and bonds. From this information, returns on investments can be calculated

TRUTH IN LENDING• Refers to the idea that the real or total cost of borrowing money should be readily

available to the investor.• Many investors borrow money (often using the equity they have in their home and

investment properties as collateral) to establish or expand their investment portfolio.

• Comparing interest rates has been difficult because some financial institutions have disguised the real cost of borrowing money by adding various fees and charges.

• Truth in lending legislation was passed in New South Wales in 2000. This legislation means, from 1 July 2003, credit providers became obliged to tell consumers more about the real cost of the money they borrowed.

• This involved the introduction of a new comparison rate that includes both the interest rate and any fees and charges, shown as a single percentage figure or rate.

• The law now requires credit providers to provide consumers with lists of comparison rates for a standard range of loan amounts and terms for their fixed-term credit products. Any advertisement for a fixed-term consumer credit product that includes an interest rate must also show a comparison rate.

SCAMS• A phone call or email 'out of the blue' offering you a

not-to-be-missed investment opportunity could be a turning point in your life. If you say 'yes' to the deal and the offer is a scam, you could lose thousands of dollars or end up with enormous debts.

• Investment scams are often so professional, slick and believable that it is hard to tell them apart from genuine investment opportunities.

• Investment scams can come to you via a phone call or email. It may even be an offer from someone you trust. There are three main types of investment scams:• The investment offer is totally fictitious and does not exist• The investment offer exists but the money you give the

scammer is not going towards that investment• The scammer says they are representing a well-known

investment company but they are lying

HOW DO SCAMS WORK?• In all cases the money you 'invest' goes straight into the scammer's

bank account and not towards any real investment.

• The scammer will offer you:• High, quick returns and sometimes tax-free benefits• Share, mortgage or real estate investments, 'high return' schemes, option

trading or foreign currency trading• No risk or low risk investment, as you can sell anytime, get a refund for

non-performance, have insured or 'guaranteed' transactions or swap one investment for another

• Inside information, the opportunity to invest before a public float or discounts for early bird investors

MODIFYING IN

VESTMENTS

TO MAXIMISE LO

NG-TERM

GAINS

KEEPING INFORMED• Keeping informed about financial issues

by reading the financial section of daily newspapers or Internet updates or by some other means can alert investors to changes that will affect their portfolios.

• For example, if economists are predicting interest rate rises it may not be the ideal time to buy property with a mortgage.

LOST YOUR JOB?• When personal circumstances change,

the investor’s portfolio would probably need to be adjusted.

• In the case of a job loss, it would be wise to move to safer investments of cash and fixed interest until a new job is found.