The best investment returns don’t come easy
Investing is a growing ‘rite of passage’ for many young Aussies looking to grow their wealth. According to a 2017 study by the Australian Securities Exchange, the number of 18-24 year olds investing doubled to 20% in just five years. For 25-34 year olds it increased from 24% to 39%. Even with all this growing interest in investing, there’s still a lot of misinformation out there. Since investing can involve working with different currencies, overseas companies, and unique terminology – it’s easy to see why. To help you find the best investment returns, let’s run through the essentials and dive deep into the art of smart investing.
What is a ‘good’ rate of return?
When it comes to finding the best investment returns, it’s important to understand what a good rate of return might look like. New investors typically lose money because they go into investing with unrealistic expectations. For one, things like compound interest are totally new concepts for most people. For another, it really depends on what you choose to invest your money in.
These rates are based on a 2018 report and will likely look different in a post-COVID world. Based on these numbers, you could say that any annual return above 8% is ‘good’ but, really, if you take anything away from what we’ve discussed here so far, it’s that a good rate of return is highly subjective.
Simple and compound interest explained
Basically, compound interest is how your investment makes money for you. Some investments will have simple interest which is where you are paid a set return on the principal amount only.
Compound interest is paid on the principal and the accumulated interest. That means that if you invest, you’ll earn a return on the initial amount you invested, as well as a return on your earnings. So, every percentage increase in profit could mean huge increases in your earnings over time.
Which investments have the best returns?
Unfortunately, there’s no black and white answer to this question. Like virtually all aspects of finance, finding the best product really depends on your goals. Investments are also heavily influenced by a range of market factors. So, regardless of what you choose to invest in, you’re going to see your returns fluctuate over time.
Bearing all this in mind, here are a few types of assets you can invest in that will generally yield ‘good’ returns.
Property can provide some of the biggest and best investment returns when compared with other assets, but it’s tricky to get into. Depending on your financial situation and where you’d like to buy, it can be very expensive. Managing and selling an investment property doesn’t come cheap either. There’s a lot of other factors you’ll have to consider when working out your overall return on an investment property.
Ultimately, your return on a property will come from two key areas:
- Rental yield is the income you receive every year from tenants living in your investment property. Generally, it’s measured as a percentage of the value of the property overall.
- Capital growth is the appreciating value of the property itself. Of course, this can be a negative return if the value of your property declines over time.
|Minimum investment:||The average deposit for a home loan in Australia is generally around 20% of the home purchase price.|
*Average return based on the 2018 Russell Investments/ASX Long Term Investing Report. Inclusive of residential property only.
Equities (otherwise known as shares, stocks, or securities) is what most Aussies tend to think of when they hear the word investing. When you purchase shares in Australian or international companies, you’re basically buying a stake in that company. If shares of that company then grow in value, your investment will too, and you may see some of that profit in your dividend payments. Unfortunately, the same principle applies if the share price falls.
Trading on the share market can offer up some very high returns, but it requires you to watch the market carefully. For this reason, many people utilise brokers and other tools to manage their share trading for them – usually at a price. Check out our beginner’s guide on how to invest in shares for more helpful info!
|Minimum investment:||For trading on the stock exchange, the minimum amount to buy shares in a company is generally $500. This can differ depending on whether or not you use a broker.|
|Average return*:||4.0% – 7.2%|
*Average return based on the 2018 Russell Investments/ASX Long Term Investing Report. Inclusive of Australian and Global share returns.
Managed funds (also known as managed investments or managed trusts) enable you to pool your money with other investors. A fund manager then holds the money on your behalf, using it to buy or sell assets. The key benefit of pooling your money with other investors is that you gain access to a wider range of investment opportunities. Naturally, this means you can enjoy higher returns than perhaps you would investing alone.
Of course, to get the best investment returns you’ll need to invest with high performing funds as it can be quite subjective. It’s also important to consider how management costs may impact your overall return and whether the minimum investment amount is affordable. Read up on all the essentials in our simple guide to investing in managed funds!
|Minimum investment:||Minimum investments vary depending on the fund manager but most will require between $1,000 – $5,000 to start.|
|Average return*:||5.3% – 5.7%|
*Average return based on the 2018 Russell Investments/ASX Long Term Investing Report. Inclusive of conservative, balanced, and growth based funds.
Fixed income (bonds)
Fixed income is a form of investment that offers regular, fixed returns over a period of time. It encompasses many different kinds of products, including:
- Government bonds
- Corporate bonds
- Peer-to-peer lending
- Cash (e.g. term deposits)
The major benefit of these types of investments is the regularity of the returns which, on average, tend to be quite high. Of course, returns will vary depending on which fixed income asset you choose to invest in. Most of the time, when people talk of fixed income investments they’re referring to government and corporate bonds.
|Minimum investment:||Directly investing into the bond market generally requires a minimum investment of about $500,000. However, minimum investments will vary greatly between fixed income products.|
|Average return*:||6.2% – 7.1%|
*Average return based on the 2018 Russell Investments/ASX Long Term Investing Report. Inclusive of Australian and Global fixed income returns.
What is the safest investment in Australia?
Buying a home has traditionally been seen as a safe way to grow your wealth in Australia. Although it requires a large amount of capital upfront (the deposit) you’re likely to enjoy a constant income from rent if you can find tenants. Of course, nothing’s guaranteed and location is everything when it comes to property. Researching trends in rent, population, schools, etc. is key. MoneySmart covers some other key factors to keep in mind when investing in property.
In terms of cash investments (e.g. savings accounts and term deposits), the risk is usually very low since you’re not putting your money directly on the line. You won’t lose money, just earn interest on what you’ve got in your account. While the benefit of this is that you can enjoy regular interest payments, the returns are often much lower than other investment products. Low risk, low reward.
Important factors to consider before you invest
Before you get too caught up in finding the best investment returns, it’s important to do your homework. Not only so you understand what you’re signing up for, but also ensuring that it’s legitimate. Some key things to look out for include:
- How does the investment work?
- How does it generate a return and in what form (capital gain or income)?
- The risks involved with the investment
- Any fees and charges that may apply to buying, holding or selling the investment
- How long will it take for you to receive the expected return?
- Legal and tax implications of the investment
- How will the investment contribute to your diversified portfolio?
More investing tips & tricks
If you’re looking into how you can get the best investment returns, make sure you check out our other helpful guides. There are many different types of high-yield investments and unfortunately we couldn’t cover all of them here. If you’re interested in Bitcoin, ETFs, or even investment apps, have a browse through our latest content for all the info!
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Oiyo is a consolidated online resource, we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.