What investments are right for me?

Once you’ve understood the different types of investments and their respective characteristics, risks and benefits, you can consider how much you might want to invest in each asset class.

This process, known as asset allocation, should be based on your current financial position, goals, timeframe and appetite for risk, while also taking into account current economic conditions and prospects.

Below is an example showing how the portfolio of ‘cautious’ or ‘aggressive’ investors might differ in terms of their component parts:

Cautious vs aggressive

The priority of a cautious investor might be to protect the wealth they’ve already accumulated, minimising risk while still seeking to generate higher overall returns than they could get by leaving all of their money in cash.

An aggressive investor would be willing to take on a greater level of risk to give themselves the chance of higher potential returns.

According to the ASX, a ‘prudent’ investor would sit somewhere in between cautious and aggressive, creating a “balanced portfolio to work towards medium to long term financial goals”, willing to take “calculated risks” aimed at generating better returns through both income and growth.

Investments to suit you

The important thing to remember if you are building an investment portfolio is that it should be created with your own circumstances and objectives in mind.

If you only have a short timeframe, commonly considered to be anything less than three years, for example, then it may be best to focus on investments with little or no risk of capital loss, such as cash in the form of savings accounts or term deposits.

Likewise, if you’re approaching or in retirement then income may be your priority, while your appetite for risk may be diminishing.

The more time you have to invest, the more you may be willing and able to allocate money to higher risk assets like shares and property.

To ensure that you’re comfortable with the level of risk and potential return within your portfolio as a whole, the component parts within each asset class should also be thoroughly researched and carefully considered.