Investment Fundamentals

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Investment Fundamentals

Investing for your goals

Investing is really all about doing something with your money that achieves a specific goal.

Therefore, the first step in any investor’s journey is to clearly identify those investment goals. To invest without a clear understanding of the end goal, is like setting sail with no particular destination in mind – you may end up just going in circles.

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Understanding risk & return

For SMSF investors, one of the most important concepts to understand is the relationship between risk and return, and how this relationship is affected by time.

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What's your risk tolerance?

For an SMSF investor, understanding their risk tolerance (or risk profile) is another very important piece of the investment puzzle. It reflects how comfortable they will be with the risk they are likely to encounter when investing in the assets that are capable of delivering the kind of returns they are after.

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The benefits of diversification

Diversification involves spreading your SMSF account balance across a variety of assets (or asset classes), rather than investing in just one or two assets. It is one of the simplest yet most powerful ways to manage the risks we highlighted in the previous articles.

When done correctly, diversification enables investors to effectively smooth out the overall effect on their portfolio of the inevitable ups and downs of individual investments.

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Setting your asset allocation

Asset allocation refers to the amounts within an SMSF investor’s portfolio that are allocated to specific types of investments.  Asset allocation provides investors with the ability to balance risk and reward, by allocating a portfolio’s investments according to their age, investment horizon, goals, and risk tolerance, using a multi-layered diversified approach. It effectively ties together all of those things we have discussed in the previous articles in this series.

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