Safety first investment

Over the next two weeks Gary Kleyn will examine the different low-risk investment options available. This week he considers when taking a low-risk position may be warranted.

THE uncertain economic climate has prompted many investment advisers to urge that investors look past the share market, and even beyond bricks and mortar. Instead, they are encouraging the adoption of highly liquid – and safe – investments.

Risk-averse investors are more likely to flee to the safety of investments such as cash deposits, debentures and government bonds.

Many others are holding tight by not shifting their investment portfolio away from those investments that have suffered in the past two years – such as international shares – choosing instead to take a long-term view.

According to Dr Chris Lavers, author of Australia’s Top 100 managed funds 2003, the most important thing to consider when deciding on an investment is to evaluate the risk profile of the person investing and that of the products available.

Dr Lavers says that, at the macro level, assets can be divided into four classes – shares, property, bonds and cash, which can be grouped into two categories based on their risk/return characteristics.

1) Defensive assets: designed to protect investor savings from significant loss of value. They generally come with a lower rate of return, sometimes even less than the rate of inflation. This category includes bonds and cash.

With interest rates in Australia now at historical lows, the returns on these investments are even lower than average, although unlike other investments, they have at least remained in positive territory.

For example, in the year to April cash returned 4.9 per cent, while in the month of April cash returned 0.4 per cent. International bonds were stronger, increasing 12.4 per cent in the past year and 0.6 per cent during April.

And Australian bonds rose 9.1 per cent in the 12 months and 0.6 per cent in April.

2) Growth assets: historically generate higher investment returns than the defensive assets.

They usually out-pace inflation, but also carry higher risk, including the risk of capital loss. This category includes property and shares.

Growth assets also tend to fluctuate widely in their performance. According to InTech International, shares are back on positive ground, rising 8.4 per cent in local currency terms during April and 5.2 per cent in Australian dollar terms, yet have dropped 19.8 per cent and 27.0 per cent respectively over the one year period.

Deciding where an investor fits on the scale between these two categories depends very much on the individual.

“All investors see risk differently. It is important to ascertain your own definition of risk so that you can choose a fund which will cater for your needs,” said Margaret Lomas, author of How to Invest in Managed Funds.