As you likely already know, there's no one perfect way to invest your money.
While it's arguably never been easier or cheaper to invest, all investments offer a trade-off between potential risk and potential returns, and it's up to you to determine what investment assets best suit your overall goals and strategy.
Of course, there's plenty of experts who've offered an opinion on the best way to invest.
According to investing legend Warren Buffett, the best investment for most people is an S&P 500 index fund, which tracks the performance of the 500 largest companies on the US stock market.1
This is a list of 9 popular investing methods in Australia, as well as the type of investor they could suit:
Shares have the greatest variety of trading options because you can choose from emerging businesses you think will explode, companies that pay dividends, established businesses in industries that are resistant to downturns and more.
It's also easy to open a stock trading account and start trading.
Individual shares can have wildly different returns over time, even the largest and most-established companies.
For example, Apple stocks had a return of around 25% in 2023, but actually returned -27% in 2022.
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Robo-advisors trade automatically based on an algorithm and invest your funds on your behalf. All you have to do is set up guidelines, such as your risk tolerance and preferred investment types, then the algorithm will allocate your funds and rebalance your portfolio accordingly. This is great for people who don't want to dedicate the time and energy to building and maintaining their own portfolio.
Given the variety of robo-advisors available, it's difficult to provide an expected return.
While many robo-advisor products track the general performance of the stock market, others may be weighted more towards government bonds or cash. This means they'll offer very different returns.
Like each of these options, high interest savings accounts can be a practical way for Aussies to take advantage of long-term compounding, with very little effort required. While this might not be inflation-beating, banks will pay out savers in return for storing their money, which they use to finance loans.
In Australia the first $250,000 you have in your savings account is protected by the government.
Savings accounts generally follow the RBA (Reserve Bank of Australia) cash rate.
When the cash rate goes up, so too do savings account rates. When the cash rate goes down, so do saving rates.
Over the last few years, savings accounts have offered interest rates from less than 1% p.a. to more than 5% p.a., due to the RBA raising the cash rate.
Index funds offer one of the best risk/reward ratios for long-term investing, meaning they offer decent rewards for relatively low risk. That's because major indices have consistently gone up in the past 90 years. For example, the S&P 500 has averaged a 10% annual return during this time, while in Australia the ASX 200 has a 30-year average of 9.4%. If you invested $10,000 into the ASX 200 30 years ago, you would have $146,000 by 2022 and that is after superannuation being introduced, GST commencing, the dot-com bust, the global financial crisis and COVID-19 lockdowns.
Index funds that track the most popular stock indices like the S&P 500 and the Nasdaq 100 (which tracks the top 100 companies on the Nasdaq stock exchange) have managed impressive returns over the long-term.
The S&P 500 has averaged an annual return of around 10.2% over the last 20 years2, whilst the Nasdaq 100 has averaged 14.5% a year over the last 20 years3.
Investing in Australian government bonds is one of the safest investments you can make but you'll get a return that matches the risk. This is because the chances of the Australian government not being able to pay its bills are incredibly low, especially any debt in its own currency.
As such, most investors see it as safer than the share market or ETFs. Investors who are trying to preserve their assets, such as those who are closer to retirement are most likely to trade in the bond market.
This is actually a surprisingly complex question. The return on government bonds is influenced by a lot of factors, especially changes in supply and demand between the body issuing bonds (the government) and those looking to buy the bonds.
Generally speaking the price of bonds goes down when interest rates go up, and goes up when interest rates drop. The yield on a 10-year Australian government bond changes all the time, so check the current yield before you invest.4
With more investment apps coming to market and a younger audience, there has been a spate of new micro investing apps that have come to market of late. Micro investing is effectively pooling your money into a portfolio of stocks or exchange-traded funds (ETFs) that the provider manages for you. The good thing about micro investing apps is you can start with just a few dollars, with features such as a round-up on everyday purchases helping to grow your balance.
Like robo-advisors, the return you can expect on micro-investing will really depend on which assets you actually invest in.
If you invest in a standard stock ETF, you could expect a return broadly in line with the broader stock market's (though you're likely to be paying more in fees which can eat into your returns.)
Property investment can be a way for young Australians to grow their wealth, although the 6-figure deposit can be a major barrier to investors getting started. But with a range of government schemes to get people invested, plus the rise of rentvesting, property can be an option to grow your wealth.
This will really depend on the type of property you invest in and where it's located.
According to data by Property Update, house prices in Sydney, Melbourne and Brisbane have doubled in a decade, while Perth property prices rose around 8% over the same period.5
Of course, your investment costs will generally be higher on property due to things like home loan interest, maintenance and insurance.
But the benefit of property investing is that if you're taking out a loan to buy the property, you're effectively leveraging your investment, which can increase any profits you make.
Being a relatively new investment option among mainstream investors and institutions, cryptocurrencies are a high-risk, high-reward investment. What’s more, there are always new coins coming out or older ones getting the spotlight every now and then. Because of that, the rate of return could be way higher than investing in stocks. But since cryptos aren’t regulated, you could lose your entire investment.
Cryptocurrencies are infamous for their volatile price movements. While many cryptocurrencies have returned thousands of percent, many others have lost more than 99% of their value (or even all of it). In fact, some cryptocurrencies have managed both.
For example, the second-largest crypto by market cap, Ethereum (ETH), returned around 9,395% in 2017, but returned -82% the following year.6
Over the last 10 years, Bitcoin has had an average annual return of around 60%7, but there's no guarantee this will continue in future.
Forex or foreign exchange is the buying and selling of global currencies. The global forex market is the largest in the world, with a daily trading volume of more than US$6 trillion. When it comes to trading forex, you're trading on the percentage in points, or PIPs, with major currencies usually trading to 4 decimal places. On the downside these tiny percentage movements, along with leverage makes trading forex incredibly risky.
This will depend entirely on your skill as a trader. Forex trading is best-suited to highly-experienced traders who can devote a significant amount of time to research and trading.
Most retail investors lose money trading CFDs, which are widely used to trade forex. ASIC research found that in 2023-24, at least 68% of retail investors lost money trading CFDs.8
As the old adage goes, the best time to start investing was yesterday, the second best time is today.
Once you're ready to start investing, you can follow these 5 steps to work out the investment that's best for you, and what you need to do to take the plunge.
Investors who are just starting out or those who never had the chance to manage their portfolio may consider using a robo-advisor or consulting an expert. Investors who want to try their luck can always start by themselves, as many platforms have research tools and low barriers to entry.
Make sure you use money that won’t impact your life if you lose it.
Depending on your goals and investment time frame, you can choose several types of accounts:
Depending on who manages your account, there are 2 types of investments accounts to choose from:
Once you open and fund your account, it’s time to put your money to work. Make sure to choose the best way to invest, depending on your financial situation and goals.
"Select a platform that offers a diverse range of investment options, such as ETFs. Also, ensure the platform aligns with your individual investment goals and risk appetite...Finally, make sure the platform has an AFSL (Australian Financial Services Licence) for that peace of mind that it is being regulated by ASIC."
| Response | 75+ yrs | 65-74 yrs | 55-64 yrs | 45-54 yrs | 35-44 yrs | 25-34 yrs | 18-24 yrs |
|---|---|---|---|---|---|---|---|
| No | 85.07% | 76% | 75.31% | 76.67% | 75.5% | 72.35% | 74.74% |
| Yes | 14.93% | 24% | 24.69% | 23.33% | 24.5% | 27.65% | 25.26% |
Once you start thinking about investing, you'll hear the term "asset class" come up a lot. Simply put, the asset class refers to a group of assets or investments which are similar in nature. It's important to understand the difference between the main asset classes when building your portfolio as it will affect your investment returns and the level of risk you're taking on.
There are five main asset classes:
Equities include all shares listed on a public exchange, for example shares listed on the ASX or the NASDAQ in the US. These are publicly listed companies and when you buy shares in these companies you own a portion of that company. Equities are often considered to be the highest-risk asset class.
Fixed interest assets are those which offer a fixed rate of return, for example bonds. Bonds are essentially a form of loan used by both companies and also governments when they need to borrow money. Investors who lend their money will earn a pre-set, fixed interest rate on that money.
This is the lowest-risk asset class and includes deposits with banks via products like savings accounts and term deposits.
This includes property investments in residential homes as well as investments in commercial property like major offices or industrial buildings. This is known as unlisted property, as it's not bought and sold on an exchange like shares are.
However, you can also invest in listed property in the form of a managed fund that invests in a range of properties. Although you do access listed property via an exchange, it's still considered part of the property asset class, rather than equities.
Alternative assets are harder to identify, but they typically include assets that don't fit into any of the above asset classes. For example, private investments made into a private company (one that isn't listed on an exchange) would be classed as an alternative asset. Another example is collectibles like antiques, art or even an extensive stamp collection.
Commodities like gold and precious metals are sometimes included in the alternative asset class and sometimes they're referred to as their own asset class.
These five asset classes can be further grouped into either defensive or growth assets. Defensive assets are lower risk and often offer investors a level of guaranteed income, for example interest payments. Growth assets on the other hand are riskier and typically aim to achieve capital growth over the longer term rather than income over the short term.
While returns are never guaranteed, it's expected that high-risk growth assets will outperform lower-risk, defensive assets over the long term.
Defensive assets
Growth assets
You could also divide the assets up depending on whether you're investing for income or capital growth. Income assets are those which provide an ongoing level of income while you hold the asset.
Capital growth assets may not provide any income for the short to medium term, but the investor hopes the asset itself will grow in value so that when it's sold, they'll make a profit. Antiques are an obvious example here.
One asset class can include both income and capital growth assets. Let's look at shares as an example. An established blue-chip share like BHP or Commonwealth Bank that makes a profit every year and consistently pays a large dividend to its shareholders would be classed as an income asset, as it offers value while you're holding it. However, shares in a newly-listed technology startup that pay no dividends would be classed as a capital growth asset, as the shareholder buys it with the hope it will increase in value over the longer term.
Investment risk is the risk of financial loss. All investments carry some level of investment risk. When you decide to invest your money, it's never guaranteed that you'll make a return on that money. In fact, you could even stand to lose the money you initially invested (and sometimes more, if you're trading products like CFDs).
To avoid putting all your eggs in one basket, one simple way to reduce your risk is by diversifying your investments across a range of asset classes. This is because each asset class behaves differently. For example, if the property market is doing poorly, it's possible the share market could be performing strongly (or vice versa). If you're only invested in one asset class, and that asset class does poorly, your entire portfolio will suffer.
You don't need to invest in every asset class, but making sure you're invested in more than one or two different asset classes will help reduce your risk. The amount you invest in each asset class will also depend on the amount of risk you're happy to take on.
For example, let's say you wanted to take on a moderate level of risk. That is, you're happy for some of your investments to be high-risk, but you don't want your entire portfolio to be. You might decide to invest a third of your money in equities, a third in property and a third in cash. If you were striving for a very low level or risk, you could reduce this to be only 10 to 20% of your money in equities, and the rest in fixed interest and cash.
It would be nice if you could earn high returns while taking on little risk, but unfortunately investing doesn't work this way. It's typically understood that the higher the risk, the higher the potential reward. This means that in order to earn a return on your investment, you're going to need to take on a certain level of risk.
It's fine to exclusively invest in low-risk products like savings accounts, but you won't get a very big return on your money by doing this. On the other hand, investing exclusively in high-risk shares could have the potential to get you much higher returns, but you're also taking on a much higher level of risk in exchange.
To find the right balance, it's a good idea to start from the outcome you're hoping to achieve with your investments. Try to figure out what success looks like for your portfolio, then work backwards to determine what investments you'll need to make to get there and how much risk you'll need to take.
Another way to reduce your risk is to invest with a long-term mindset. Investments, like shares, can be very volatile, often rising and falling by a significant amount in the space of a month or less. But if you're invested for the long term, say 10, 20 or even 30 years, you won't be as bothered by short-term market movements. A lot of higher risk share portfolios predict they'll achieve their objective (i.e. they'll achieve the high returns that they're aiming for) after 7-10 years, despite a lot of ups-and-downs along the way.
The dollar cost averaging strategy is a way of buying small parcels of the same asset gradually over time, rather than buying it all at once. For example, let's say you wanted to invest $20,000 into The Smith Company. Instead of buying $20,000 worth of The Smith Company shares in one hit, you could buy $2000 worth of the shares each month for 10 months.
This means that you're not having to pick a certain share price to buy your shares, which opens you up to the risk of buying them at a bad price. Instead, by buying the shares in The Smith Company in smaller parcels over a longer period of time, the average price of your shares will be a lot more accurate and closer to the true value of the shares.
This strategy helps reduce the risk of buying the shares at a bad price; however, it does mean that you'll pay more in brokerage fees as you'll need to pay brokerage on each trade. For this reason, the dollar cost average buying strategy is more worthwhile when you're investing large amounts of money.
When designing your portfolio, take the following factors into consideration when deciding which asset classes to invest in.
Now that you understand the different asset classes, if you're ready to start building your portfolio you might want to check out our seven-step guide to buying shares online.
It may go without saying, but one of the main strategies to reducing your investment risk is to do some research.
Investing in assets with little thought, or investing in something based on rumours or speculation from others, is a sure-fire way to increase your risk.
Here are a few easy ways to research potential investments:
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