30th July 2008
Income Investments vs Capital Growth Investments
In today's complex investment world, it is increasingly important to understand all viable investment options and strategies. Asset allocation is a key ingredient for a successful investment portfolio and it can be easily summarised by the tried and tested adage "don't put all of your eggs in one basket."
By effectively diversifying your assets, you can lower your overall investment risk while achieving your financial goals. In fact, many studies have revealed that the asset allocation decision can be the most important decision made by an investor.
Selecting the investments should be the last piece of the puzzle. Before you can invest, you must first decide on your investment needs and tolerance for risk.
All investors have different investment objectives, so the type of investments you select will depend on your own situation. Investment objectives change as we become older and will depend on our ability to generate income from other sources such as employment. A 35 year old investor with potentially 30 years' working life remaining will have a different investing outlook to a 70 year old retiree. This has been highlighted in recent share market movements where many retirees reliant on superannuation investments have seen dramatic decreases in the values of their share portfolios.
Once you have decided on your investment objectives, you will then need to decide between the two most common objectives of investing, these being investing for capital growth or for income streaming. When making this decision it is important to remember that all investors can benefit from having exposure to both capital growth investing and income investing - it is just the mix of these that may change over time.
Capital growth investments will hopefully increase in value over time. The best examples of capital growth investments are property and shares (equities). Both these types of investments are purchased with the hope that they will be sold at a greater price than what they were purchased for, with the benefit to the investor being the difference between purchase price and sale price.
Income earning investments are investments that provide a regular source of income. Generally, this can be in the form of interest or distributions, and investments which can generate this type of income include term deposits, property trusts and fixed-interest securities.
Most investors would agree that the key to a successful investment strategy is diversification. Recent events in the share and interest rate markets in Australia have highlighted this importance. By exposing yourself to both these areas, you can effectively lower your risk. In the current economic environment, many investors with exposure to income bearing investments have effectively lowered their risk compared to those who have invested solely in equities.
La Trobe offers four investment options, all of which aim to provide a regular income stream, rather than capital growth. Interest, at the request of investors, can be reinvested.
Investment Option 1 - Cash & Mortgages Option
This option offers investors a competitive variable rate of return with flexible access to their funds on twenty four hours' notice. Investment is in a range of Australian dollar assets and mortgages, with interest paid monthly. This investment option is currently returning 7.50% p.a., variable*.
Investment Option 2 - Pooled Mortgages Option
This option offers investors a variable rate of return from a pool of mortgages chosen and managed by La Trobe's experienced management team. Investment is in a broadly diversified pool of Australian registered first mortgages, with no exposure to the US sub-prime market. This option has an initial twelve month investment term and has been independently rated by Standard & Poor's and Property Investment Research**. This investment option is currently returning 8.25% p.a., variable*.
Investment Options 3 & 4 - Select Mortgages & Special Situation Mortgages Options
These two investment options offer investors the ability to individually select the mortgage investments in which they want to invest, depending on their appetite for risk and return. Both options offer the choice of fixed and variable rate of returns (subject to availability). The investment decision is made by investors after considering information about the loan, its term and its rate of return, the security property and the borrower. Interest rates vary between the options and the individual investment selected. Current returns range from 8.00% - 18.50% p.a.*
*The rates of return from the Fund are not guaranteed and are determined by the future profits of the Fund. Past performance is no guide to future performance.
**Copies of the Standard & Poor's and Property Investment Research rating reports can be viewed on the La Trobe website www.latrobefinancial.com.au or by clicking on the links on the right-hand sidebar.