Most investments can be categorised into either lower risk defensive assets (eg. cash and fixed interest), or higher risk growth assets (eg. property and shares).

As a rule, the higher the investment risk, the higher the potential return. Consequently, over time, returns from growth assets generally exceed returns from defensive assets. However, it must always be remembered that the higher the return, the greater the risk or volatility and the potential for loss.

Understanding the pros and cons of all the available investment types – and what’s right for you – can be a difficult task. A professional financial planner can help you select the right investments to suit your individual needs.

Below is a brief explanation of the main investment sectors (otherwise known as asset classes).

Defensive assets

Cash

Cash (eg. bank accounts and bank bills) are generally only considered appropriate as primary investments if your time frame is short (up to three years), or to accommodate the need for ease of access.

If you’re looking at investing for three years or more, growth assets may be a far better investment choice.

Fixed Interest

Many investors believe the fixed interest sector consists solely of investing in bank term deposits. A bank term deposit is where funds are “locked in” for a fixed period and earn a set return. However, fixed interest investments actually come in many forms including:

• treasury notes
  a short term debt instruments issued by the government;

• debentures
  interest bearing securities commonly issued by finance companies; and

• fixed interest trusts
  a unit trust that invests in a range of fixed interest securities. For example, mortgage trusts and bonds (government, semi government and corporate).

Property

People’s largest investment and asset is usually their own home. However, investing in property isn’t confined to owning your home or even a rental property. The property sector comprises the following classes:

• industrial;
• commercial;
• residential;
• retail;
• rural; and
• tourism.

Shares

Put simply, purchasing shares gives you part ownership in a company and the right to receive a portion of the profits (commonly referred to as dividends).

Changes in share prices reflect the market value of the company. Fluctuations in the market value of shares will be reflected in the underlying value of your original investment.

Income is paid to you in the form of dividends, representing your share of the company’s profits.

An added bonus is that dividends can provide you with substantial tax benefits, because they are usually franked - either fully or partially. This means the company has already paid tax on this money - usually to the corporate tax rate of 36 per cent. In some cases, it may be even higher.

The share market is characterised by volatility, with the value of share prices often fluctuating on a daily basis. However, over time, the impact of the daily movements diminishes. In fact, over the past twenty years, shares have consistently outperformed other investment sectors.

The share market can be a high-risk prospect if you speculate. Speculators “gamble” by attempting to profit from short-term fluctuations in share prices. The risk is substantial because it’s extremely difficult to predict the market’s movements over the short term.

Shares can, however, be relatively low risk if you take a longer-term view and invest in well-researched companies that are fundamentally sound.

If you are not comfortable entering in to the share market directly, but want to invest in this asset class, a managed investment (where your funds are pooled with those with other investors and invested by specialists) may be a good investment option for you.