Advice Centre
Frequently Asked Questions
Financial Advice | Superannuation | Retirement | Investing | Insurance
Risk & Asset Allocation
What is a risk profile?
A risk profile, also known as an investor profile, categorises investors based on their willingness to take risks in order to achieve higher returns. This information is then used to select the appropriate investments to match their risk profile. Read more
How do I work out my risk profile?
Your Risk Profile depends on factors such as your goals, age, resources, investment timeframe and tolerance to risk and volatility. These factors can influence your attitudes to some of the basic financial questions most people face during their lives and will change throughout your life.
Before undertaking any investment recommendations, an Adviser will work with you to ascertain an appropriate risk profile so they can then recommend suitable investment strategies and products.
What are the different asset classes?
The four main asset classes are:
- Cash – investments in cash are more than just money retained in your bank account. They can include investments in cash management trusts and short-term money market investments. Cash investments are considered safe and can provide a source of income, however, they do not provide the potential for any capital growth, and over time the capital may be eroded by inflation.
- Fixed Interest – also known as bonds, fixed interest investments can include term deposit and debenture style investments, as well as government and corporate bonds. Fixed interest investments offer investors regular interest payments with a guarantee to repay capital at a future date. They are relatively secure investments; however, they can depreciate in value as a result of interest rate movements.
- Property – property is a broad asset class that can include items such as residential, commercial and industrial property, which may be held either directly, or indirectly through property trusts and funds. Property can provide income but it is also a growth asset which has the potential to deliver higher returns, but also carries with it higher risks.
- Shares:
- International shares – as the name suggests, international shares are investments in companies listed on international stock exchanges, such as London, Hong Kong, or New York. International markets make up around 98% of all investments, and as such, provide exposure to a broad range of investments over which to diversify your share holdings.
- Australian shares – Australian shares are investments in companies that are listed on the Australian stock exchanges. Australian share investments make up about 2% of world investment markets; however, they can play an important role in the diversification of your portfolio. Australian shares also often deliver tax benefits on their dividends. Shares are considered growth investments, and, like property, carry high risks but have the potential to deliver higher returns.
Read more about investing basics
What is diversification?
By not investing all your funds into the one investment, or even the one asset class, you can significantly reduce the level of fluctuations in your investment value. This type of investment approach is known as diversification.
Diversification is about selecting investments that complement each other and perform well at different times of the economic cycle.
Read more about investing basics
Investment Portfolios
What is a managed fund?
Investment Funds (also known as Managed Funds) are pooled funds that enable smaller investors to collectively invest into larger assets that would not be viable for them as individual investors.
The money is managed by professional investment managers who make investment decisions on your behalf according to the investment strategy for that particular fund.
When you invest in managed funds, you buy units which represent your share of the total value of the fund. The unit price changes over time as the market value of the assets in the fund rises or falls, just like shares. The value of your investment at any time is equal to the number of units you hold, multiplied by the unit price, less any management fees owed.
When funds generate income, investors recieve a payment called a distribution. This distribution is your share of income earned over the financial year and can be paid into your bank account or reinvested to purchase more units.
You may access your money at any time, however it normally takes 7-10 business days for the proceeds of a withdrawal to be credited to a bank account.
What do I need to consider before buying an investment property?
Buying a property to rent out should be considered as a long-term investment. There are many factors to consider before you delve into the property market such as tax, interest rates and landlord responsibilities. Read more
How can I sell my shares?
There are number of ways to sell your shares depending on your personal circumstances. You could utilise the services of a full service stock broker who can provide advice on what shares to sell and/or buy.
Alternatively, if you just wanted to sell your shares without receiving advice, you could utilise the services of a discount broker. You can buy/sell shares over the phone or via the internet. Some discount brokers offer small online trades for between $20 and $30.
In most instances you will need to open an account with the broker, however, there are some online brokers that will perform one-off trades without requiring an open account.
How much Capital Gains Tax do I need to pay if I sell my shares?
Capital Gains Tax is not a separate tax. The net capital gain on selling your shares gets added to your taxable income and tax is then calculated via your income tax return.
The following steps will help you determine how to calculate your capital gain:
- Determine your capital proceeds i.e. the money you will receive from the sale of your shares.
- Determine your cost base. Your cost base includes:
- the original purchase price
- any costs associated with purchasing it (brokerage etc)
- any costs associated with selling it (brokerage etc)
- Capital proceeds - Cost base = Gross capital gain:
- Apply any discounts or concessions that may be available (e.g. If shares were held for more than 12 months a 50% CGT discount will apply)
- Gross capital gain x CGT discount (if applicable) = net capital gain
- Add your net capital gain to your taxable income. The tax you pay will then depend on your marginal tax bracket.
We recommend speaking to your accountant or tax adviser to receive personal tax advice
Investing Basics
What is the difference between growth assets and income assets?
Growth assets are those assets which focus on delivering capital growth (such as shares and property), whereas income assets have a focus on delivering income (such as cash and fixed interest). Because growth assets bring with them the potential for higher returns, they are often more volatile than income investments, which may produce lower, more stable returns.
What is a loan-to-value (LVR) ratio?
A loan-to-value ratio (LVR) is an expression that compares the value of a portfolio with the level of debt that is associated with the portfolio. The LVR is measured by dividing the value of the debt by the value of the asset. For instance, if you have a $120,000 investment portfolio, and your investment debt associated with the portfolio is $70,000, you would have an LVR of 58% ($70,000/$120,000). Your equity would be 42% (100-58).
It is commonly used to express an investor’s equity within a portfolio, to define how much a lender will borrow against an asset, and to determine whether lender’s mortgage insurance will apply to a home or investment loan.
What is a margin call?
A margin call can occur if you have borrowed and invested using a margin loan or similar loan instrument. A margin call is a situation that arises when the loan-to-value ratio (LVR) of a portfolio rises above a limit pre-approved by the lender (ie. the value of equity in the portfolio falls below an acceptable level). In these instances, the lender requires the investor to contribute additional equity to the holdings (either in the form of cash or additional security such as shares or other investments) to restore the LVR to an acceptable level. Alternatively, a portion of the investment may need to be sold to restore the LVR.
Margin calls may occur as a result of market movements or the withdrawal of equity from a portfolio. LVRs should therefore be regularly reviewed to reduce the risk of a margin call occurring.
What is the difference between 'good' debt and 'bad' debt?
So called 'good' debt is debt for which you are able to claim a tax deduction for interest costs as the funds are being used to generate assessable income, such as an investment loan or an investment property loan. Conversely, 'bad' debt is debt for which no tax deduction can be claimed for interest costs, and can include debts such as your mortgage, credit card debts and personal loans.
What is debt recycling?
Debt recycling is the process of turning bad debt (otherwise known as non-deductible debt) into good debt (known as deductible debt). This process generally involves borrowing funds for investment purposes and using the income from those investments, and any surplus income, to pay down the bad debt (such as your mortgage), with the increased equity then redrawn and used to top-up the investment portfolio.
Although this strategy may result in it taking longer to clear your mortgage, you are potentially creating wealth at the same time. Whilst it is an advantage to move from non-deductible debt to deductible debt, this strategy is only effective if your underlying investment(s) perform well.
Last updated on 19th March 2012
