Ask An Adviser - What Is The Safest Investment Option For New Investors? (3)

Top answer provided by:

Mark Candy

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Hi Belle,

First off, I think it’s great that as a young person, you are already starting to think about investing. I’m a firm believer that the earlier you can start, the better off in the long run, you will be.

Given the significant volatility that we have seen in the investment markets recently, consideration of lower risk investment options have increased in importance, as investors consider alternatives.

The following investments offer lower risks than say shares and may provide some potential ‘peace of mind’.

1. Savings accounts
2. Term deposits
3. Bonds – Government and Corporate
4. Bullion – Gold and Silver
5. Property – fractional investing

Savings Accounts

Now that interest rates are on the rise following recent historic lows, high interest savings accounts offered by banks, credit unions or building societies are becoming more appealing. Providing certain conditions are met, say a minimum deposit, certain number of monthly transactions, monthly fee, and grow the nominated savings balance, then a higher rate of interest can be earnt. For example, ING’s Saving Maximiser is currently paying 4.55% p.a. at time of writing.

Term Deposits

This investment allows you to earn interest on an allocated amount of money that you lock away for a set period of time. For example, you invest $5,000 into a term deposit for 6 months, during which time you receive interest on the savings which could be paid out monthly, or at the end of the term. The interest rate earnt, may depend on which payment method is chosen. You may choose to access your money before the end of the term, but you will most likely face a penalty fee, a reduced rate of interest or some other charges.

Bonds – Government and Corporate

Bonds involve lending money to governments or companies in Australia (who will use this borrowed money to invest), in return for regular interest on your money, after a certain period. Investors will receive their money back when the bond reaches maturity.

Australian Government bonds (or treasury bonds) are issued on sovereign debt by the Australian government and guarantee a rate of return if held to maturity.

Corporate bonds are issued by companies to fund projects. It is important to consider the credit risk of corporate bonds before any purchase because if the company goes out of business, then you won’t get your coupon payment and you may not get your face value back.

Minimum investments are usually much higher with these investments and can range anywhere from $10,000 up to $50,000.

Bond interest can be paid as (1) Fixed rate – the interest rate is set when the bond is issued and does not change. Offers fixed coupon payment and steady income stream. (2) Floating rate – coupon rate changes when the interest rate goes up or down over the term of the bond. (3) Indexed bond – interest rate is indexed against the Consumer Price Index (CPI), which protects investors against inflation as coupon payments increase in line with inflation.

Bullion – Gold and Silver

Investing in gold and silver is often considered as a ‘safe haven’ and may provide stability and diversification to an investment portfolio during times of market volatility. It also potentially offers investors wealth preservation and usually provides a good hedge against rising inflation. It is also said to provide ‘an inverse correlation’ to other assets. Meaning, if share markets fall due to uncertainty and inflation, then gold or silver may produce enhanced returns.

You can buy gold and silver from bullion depositories such as Perth Mint or ABC Bullion and they offer savings plans, where you can invest with as little as $50 per month, similar to a savings account. Alternatively, you can purchase coins or jewellery directly, gain exposure via an Exchange Traded Fund (ETF), or invest indirectly by buying shares in companies that mine, refine and trade these precious metals. Note though, that share prices are affected by a company’s profitability, environmental and geo-political footprint, and regulatory risk.

Property – Fractional Investing

One of the biggest advantages of this investment is the low barrier to entry when compared to traditional property investment. Investors don’t need to save 10-20% of a property’s value as a deposit - they can own a share of a property for a very small initial outlay. Think of it as form of property crowd-funding!

There are several options available for buying an investment property through factional ownership but as with all investing, it’s a good idea to do your research before jumping in. Some do offer relatively low risk options though because the amount you invest is low. Typically, they generate a low level of ongoing income and are primarily positioned for long-term capital growth. 

Some providers in this space include: BrickX , DomaCom and CoVESTA.

Some useful tips to help you get started and to assist with reducing risk:

1. Do your research – think about how much you want to or can afford to invest, what your options are, and what types of investments you could use to help you reach your goals.
2. Know your risk profile – work out how much risk you’re willing to take and what types of investment options might fit within this. Different investments carry different levels of risk, so it’s important to understand the risk involved in each investment product or strategy you’re considering.
3. Speak to an adviser – if you have any questions or want more help or information, speak with a financial adviser. 
4. View ASIC’s MoneySmart website – for useful resources.

* It is worthy of note though that with ‘lower risk’ comes ‘lower returns’ and that it could be argued that no investment is totally 100% safe, because with any investment, your capital can potentially always be at risk, regardless of whether it is within super or outside of super. Even if that risk is a loss of ‘purchasing power’ over time as inflation increases.

All the very best with your investment journey.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

Article by:

Mark Candy

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