Most people understand the objective of investing money: the end result is to generate a profit. The rate of return you receive for investing your cash into a particular investment vehicle is heavily dependent on the type of investment, plus the inherent risk associated with the opportunity.
“Long term investing” often brings to mind the ideal of buying an investment property now and holding onto it for the next 20 years. Yet there are other types of investment vehicles that can be ideal for long term investing goals.
What most people forget to take into account when choosing their investment strategies is that there are two primary types of investments:
- Wealth-creation investments
- Security investments
In most cases, wealth creation investments are those that offer a high rate of return. Wealth Creation investments can include:
- Share trading
- Undiversified share portfolio (highly focused on two or three stocks and often geared)
- Property development
- Highly geared property investment
The objective of these types of investments is to ideally increase the amount of money the investor has at the end of the investing exercise. They can also represent a higher risk level.
Security investments tend to return a lower rate return by comparison. Due to the nature of the investments, they also often represent a significantly lower risk. These types of investments include:
- Highly diversified share portfolio
- Managed funds
- Conservatively geared property investments
More aggressive investors will tend to shun the comparatively low returns offered by ‘security investments’, opting instead to aim at the much higher returns available with other vehicles.
Yet, the key to successful long-term investment does involve a strategic mix of both types of investment. The higher returns of wealth creation investments can help to grow capital initially, but allocating some funds towards the security investments allow you to preserve and protect wealth over the longer term.
Those lower-yielding investments, such as your superannuation fund or privately owned managed funds, can add up over the long term to staggeringly large amounts. This could be partly due to the compounding nature of reinvesting profits and holding them over the long term.
Regardless of the type of investment vehicle you choose, any successful investor does understand the inherent relationship between rate of return and risk associated. Rather than gamble with your financial future and put all your cash into high-return wealth creation projects, consider the benefits of syphoning off a little of those profits to put towards security investments.
If you aren’t sure how to break down your own investment strategy to allocate funds in a way that suits your own financial goals, it’s important to discuss your desired results with a financial advisor and an accountant. This will give you the best possible information with regard to ownership structures, allocation amounts and any tax implications that may arise as a result of your investment decisions.