Text version: Investing between the flags
About this booklet
What's the secret of investment success? Instead of relying on
good luck, the wise investor takes time to understand the basic
principles of investing, then develops and sticks to a sound
Reading this guide will put you on the path to investing wisely.
However, the guidance we offer is general in nature. Working out a
detailed strategy that meets your individual needs may require the
help of a licensed financial adviser.
What is investing?
Investing is putting your money to work to help you achieve your
personal goals. It is like a lot of things in life - rewarding but
not free of risk. When you go swimming at the beach, you reduce the
risk of drowning if you swim between the flags. When you invest,
you reduce the risk of losing your money if you invest 'between the
We all have different experiences and goals, so your decisions
about investing may be different to those of your parents,
children, workmates or friends.
The key to deciding what's right for you is knowing your own
circumstances and goals.
Questions to ask yourself
- What are your reasons for investing?
- Is what you hope to achieve realistic?
- Are you ready to invest?
- What is your timeframe for investing based on your goals?
- Where will you invest?
- Have you considered current market conditions and your
tolerance for risk?
- Do you understand what you are investing in and is it
appropriate to your needs?
- Have you checked the terms and conditions of the investment and
any fees or commissions you'll pay?
- Will you invest on your own or use an adviser?
- Who is selling this investment?
Don't rush into investing. Think about what it would be like to
lose all your money. Make sure you're clear about why you're
investing and only invest in products you understand.
Investing 'between the flags'
When you see this orange boxes in this booklet, it's a sign that
the guidance we're offering will help you reduce the risks
associated with investing in general.
However, like swimming, investing is never going to be
risk-free. Even with careful planning, you can still get caught out
- for example, if economic conditions change or a company goes out
of business. Taking care with your decisions and choices is your
Wise investing behaviours: 'between the flags'
- You have control of your debts, enough
insurance coverage and money for emergencies.
- You've identified your goals, values and
circumstances. Your goals are realistic given your
timeframe for investing.
- You're aware of your investing style and
tolerance for risk. You've sought personal
financial advice where you don't understand something or feel you
- You understand how the investment works.
You're aware of the risks involved and have
weighed these up against the potential
- You have a mix of investments to help control
the total risk of your investment portfolio.
- You monitor your investments and adjust them
if conditions or your circumstances change.
Unwise investing behaviours: 'outside the flags'
- You've borrowed to invest even though you're
having trouble paying off your current debts.
- You're not sure exactly what you're investing for but just want
to make the most money in the shortest
amount of time.
- You invest in a product you hear advertised on the radio, but
don't understand how it works or what the
- You send money overseas based on a phone call from a foreign
'trading company' offering you a special deal and
promising big returns if you act quickly.
- All your money is tied up in one type of
- You ignore your investment statements and have
no idea how your investments are performing.
Getting ready to invest
If you're going to the beach, you know to 'slip,
slop, slap' and check the conditions are safe for swimming. If
you're planning to invest, it's best not to jump in until you know
Are you an investor?
Maybe you think of an investor as someone rich enough not to
have to work, who just lives off the income from their investment
portfolio. Maybe you see an investor as someone who trades shares
Portfolio owners and share traders certainly are investors. But
you are probably an investor too. An investor is someone who puts
money (capital) into an investment product or an asset in the hope
of increasing their capital or getting an income - or better still,
doing both. That means just about everyone invests, even if it's
money in your bank account or your superannuation (super) fund.
You may start thinking about investing because you've come into
some money - from a redundancy or compensation payout, an
inheritance or gift or a lottery win. Or you may have a specific
goal - to build a deposit for a home, to take an overseas holiday
or to help someone through a tough patch.
Either way, make sure you're ready to invest by checking you
- your debt under control
- enough cash for emergencies
- adequate insurance protection.
You can also think about getting personal financial advice (see
Are you ready to invest?
Is your debt under control - for example, are your monthly
repayments comfortably less than your monthly average household
income? Do you have a problem paying your credit cards, mortgage or
other personal loans?
It's important to get these debts under control before you think
of investing. You can't invest money you need to live on.
Careful budgeting is the first step to reducing debt. But
remember to give yourself flexibility to meet unexpected expenses
or lifestyle opportunities. If you feel like you're drowning in
debt, speak to a financial counsellor.
Do you have cash savings you can draw on in an emergency?
A good rule of thumb is to have ready access to cash equal to 3
months of household expenses.
An easy way to save is to set up an automatic deduction from
your pay to a higher interest savings account (either directly from
your employer or from your transaction account on the day after you
Have you arranged protection for yourself, your family and your
home or other property? What about your car? Your income? If your
property is stolen or damaged and you don't have it insured, it
will cost you money to replace it.
If you or another income earner in your family gets seriously
ill, has an accident or dies, you'll have less income to meet
normal expenses - and you may have extra costs. The sick pay you
get from your employer may not be enough to protect you and those
who depend on you. If you have to sell investments quickly to cover
these costs, you may not get a good price.
You may have some personal insurance cover through your super
fund - check to see what it offers. Talk to a licensed adviser or
insurer about how to get an income even if you can't work and how
to meet the costs of traumatic personal illness. Sufficient cover
may cost a lot less than you think.
Your questions answered
How do I get personal financial advice?
You may wish to seek professional advice to set up an investment
plan. Choose an appropriately qualified adviser rather than seeking
advice from family members, friends or colleagues. Sometimes your
interests and those of others are not the same.
Ask a potential adviser lots of questions until you are
satisfied they have the right experience to help you, and that you
feel comfortable dealing with them.
If you're not ready to get personal financial advice, the
Centrelink Financial Information Service (FIS) can help you with
free and independent seminars and information about investing.
About personal financial advice
Only someone who works for or represents a business that holds
an Australian financial services (AFS) licence can give you
personal financial advice.
A licensed financial adviser should consider your objectives,
financial situation or needs, and then recommend strategies and one
or more financial products to suit you.
At the end of the process, you'll get a written Statement of
Advice (SOA) - a personalised, carefully structured plan to meet
your goals, needs and timeframes.
Take time to understand any recommendations and why the adviser
thinks the plan is right for you.
Choosing an adviser
Choosing a financial adviser is an important personal matter. Do
some research and talk with a few advisers before you decide. Some
will do a better job than others. Look for someone who:
- will put your needs first
- works often with people in your situation
- will fit in with you personally.
Only talk to advisers who are employed by or who are authorised
to represent a licensed advisory business.
ASIC licenses and regulates the financial advisory industry so
that it operates efficiently, honestly and fairly. Licensing means
you have more protection if something goes wrong, including the
right to a free and impartial hearing of consumer disputes.
You can check details about financial advisers on ASIC's
financial advisers register at moneysmart.gov.au.
Benefits of personal financial advice
When you get a financial plan from a licensed financial adviser,
you get the chance to discuss your situation in detail. Good advice
from an experienced, well-informed financial adviser can help you
save money and become more financially secure.
When you deal with a licensed financial adviser, you can
complain if something goes wrong. Advisers who are members of a
professional association are subject to member standards, operating
guidelines and disciplinary procedures.
Cost of personal financial advice
The Financial Services Guide that your adviser gives you will
say how your adviser is paid. Specific amounts will be shown in
your Statement of Advice (SOA).
Advisers are usually paid:
- A fee to formally document the advice, strategies, and any
financial products recommended. Even if you decide not to proceed
with the recommendations in the SOA, you will generally be expected
to pay for it to be prepared.
- A fee to cover the administration work required to implement
- An ongoing advice fee if you have agreed to pay for an ongoing
service. This may include an annual review with your adviser,
regular reports on your investments, newsletters and invitations to
Commissions and volume-based payments for recommending financial
products can influence the advice given by financial advisers. Many
of these payments were banned from 1 July 2013 but some commissions
can still be paid, such as on life insurance products. You should
also ask the adviser about any conflicts of interest, such as
commissions or other payments that they may receive.
Step 1: Know
your goals and risk tolerance
What's on your investment horizon? Take time to
think about yourself, your values, your dreams and aspirations.
Where do you want to be in 5, 10 or 20 years?
Your investment goals
Think about yourself and your goals before you choose any
Some people have a very simple investment goal: get rich quick.
Some succeed - though more by good luck than good management.
Others get hooked into schemes 'outside the flags' that promise
the world but deliver a very different outcome: get poor quick.
They may think it's safe to swim, but they soon get out of their
A sound approach to investing starts by identifying what you
want to achieve by when. The good thing about setting goals is it
forces you to plan. Having a plan - ideally written down - helps
motivate you to stick to it. You may want to start with an easy
goal such as taking a trip or paying for some extra study.
Then, once you've achieved that goal, you'll feel more confident
about going after your longer-term goals.
Example plan of goals and investment
||Short-term (1-2 years)
||Medium-term (3-5 years)
||Long-term (over 5 years)
||By the time I retire
|Extra to cover health bills
|Amount invested now
|Extra amount needed
|Sample monthly investment*
While your investment goals are very important, there are some
other things to think about that will help shape your financial
Setting a timeframe for each of your goals will help you stay
You may want to achieve some goals in the short term - say
within 2 years - such as a holiday, a car or elective surgery. You
may have other goals for the medium term, say 3-5 years, as well as
some for the longer term - over 5 years.
You'll also want to maximise your retirement income. For most
people, the super guarantee contributions paid by your employer may
not be enough to support the kind of retirement lifestyle you're
dreaming about. That means you'll have to plan to supplement your
super and ensure that your investments work hard for you until
you're ready to retire.
Think about how much you can afford to invest and for how long.
Some investments can be cashed in easily, like shares in
publicly-listed companies. If you invest in term deposits or super,
you can't readily access your funds.
Your appetite for risk
Where do you fit on the risk-taking spectrum? Some people are
naturally more cautious than others. Some are naturally more
confident and prepared to take a calculated risk. Some people are
up for almost any challenge - beating the market is just one more
trophy in the cupboard.
Different investments carry different levels of risk. To sleep
easy at night, be clear about what the likely risks are before you
Some people like to be in control and do things for themselves.
They are confident they have the knowledge and experience that
decisions about investing require. If that's your style, you may
want to develop your own portfolio of investments or set up a super
fund you manage yourself (see below).
On the other hand, you may prefer to invest through
professionally managed investment and super funds.
Your investment goals will reflect your values - what you feel
is important in life. But your values may also affect what you
decide to invest in.
These days many people want to take a socially responsible
approach to investing. They look for investments that achieve good
outcomes as well as good returns - for example, industries that
produce 'clean' energy or that promote sustainable development.
Understand how investments work
Having different types of investments, not just
one, can help you reduce the risk of any profits you may have built
up over time getting washed away by the changing tide of economic
news and market sentiment.
When you look at the financial pages of the newspaper or a
financial provider's website, the choice of investments can be
overwhelming. Many financial products have similar sounding but
subtly different names. How do you know which one is right for
The first thing you need to know is that there are basically two
types of investment - debt and equity. If you're planning to
invest, you should understand the difference (see the table
The second thing is that no single investment is likely to meet
all your needs. You're better off having a mix of investments that
work together as a team. The trick, of course, is getting the right
mix to match your needs and the risks you're comfortable with.
(You lend money)
(You own part or all of a property or company)
- direct - savings accounts (including cash management accounts,
online savings accounts and term deposits)
- managed - cash management trusts
- direct - corporate or government bonds
- managed - bond trusts
- direct - investment properties (usually residential
- managed - property trusts (usually commercial property)
- direct - Australian and overseas shares
- managed - share trusts
Cash and fixed interest (debt investments)
How they work
Cash and fixed interest investments are called 'debt'
investments. This isn't because you owe the debt but because you
own the debt. You are lending your money to someone else - a bank,
company or government - and getting interest (income) in
Depending on the type of debt investment you choose, the
interest you receive can be at a fixed or floating (variable)
How they meet your needs
Debt investments are suitable for meeting short-term investment
goals. Even though the returns may not be high, your capital is
safer than for equity investments. Currently, some investments are
With cash investments (except term deposits), you can usually
get your money back straight away if you need it.
Find out more
Technically, unlisted debentures and mortgage funds are debt
investments, but they can be much riskier than other fixed interest
For more about the risks of debentures and mortgage funds, see
Investing in unlisted debentures and unsecured notes and
Investing in mortgage schemes.
What you need to consider
Most investors choose debt investments because they give a
regular income, rather than for capital growth. (You may get some
capital growth if you invest in bonds and your bond's price rises
because of a fall in interest rates.)
Interest rates vary over time depending on decisions made by the
Reserve Bank of Australia and your financial institution. If
interest rates drop, your income from cash investments will also
Over the long term, you also need to think about the effect of
inflation on your capital. For example, if you invest $10,000 for
20 years without reinvesting any interest you earn, you'll still
have $10,000 at the end - but it will be worth less because of
If you have a term deposit, your funds may be automatically
'rolled over' into another term deposit when the specified 'term'
expires. Check that the new interest rate isn't lower than the
Property and shares (equity investments)
How they work
Property and shares are called 'equity' investments.
This is because you become a part or full owner of the company
or property in which you invest.
With equity investments, you may receive income as rent or
dividends. The value of your investment may also rise over time if
the value of the company or property increases.
You can invest in property directly - houses, home units, shops,
factories, warehouses and offices in Australia or overseas. Or you
can invest indirectly in professionally managed property
These schemes typically invest in a range of large commercial
and industrial property (shopping centres, resorts and office
blocks) or in mortgages over these types of assets.
Property trusts that are 'listed' - known as Australian Real
Estate Investment Trusts (A-REITs) - can be bought and sold on the
Australian Securities Exchange (ASX) like shares.
How they meet your needs
Equity investments are suitable for building wealth and meeting
longer-term investment goals. These investments are sometimes
referred to as 'growth' investments because both the income you
receive and the value of your capital can grow over time.
On average, over the long term, the returns from equity
investments are higher than those from debt investments, and the
total return (income plus capital growth) can exceed the negative
effects of inflation.
Equity investments can also be tax-effective (see below).
What you need to consider
Over the shorter term, equity investments can rise and fall in
value significantly (this is called volatility). Generally, the
higher the return, the higher the short-term volatility. You need
to take a long-term perspective and not be dismayed by the
inevitable ups and downs of the market, especially for shares and
listed property. You also need to look for growth that outperforms
inflation with these investments.
Weighing up risk and return
Generally, the higher the return, the higher the short-term
[For diagram of 'weighing up risk and return' please refer to
between the flags PDF]
Even though long-term returns may be higher on average for
equity investments, there is a risk that the value of equity
investments might fall at any time so your investment is worth less
than the amount you paid for it.
In other words, you could lose some or all of your money. To
reduce the risk of this happening, use diversification (see below).
For example, having around 10-15 share holdings across different
sectors of the market (financials, industrials, agriculture,
energy, health, tourism, telecommunications) will help reduce your
With a direct investment in property, you will need to meet
initial and ongoing costs - for example, legal fees, insurance,
maintenance, rates, stamp duty, strata fees. The value of the
property can also fall, you may not be able to rent or sell the
property when you need to, or you may not be able to pay the
mortgage if interest rates rise or you lose your job.
If you invest in a listed property scheme, the value of the
units may go up or down in line with the sharemarket or for reasons
specific to that trust. You can lose some or all of your money.
If you need cash in a hurry and all of your money is invested in
property or shares, you may be forced to sell at a loss.
Shares are a long-term investment
Share returns could be volatile in the short and medium term.
But if you hold your shares over a longer period, the risk of
ending up with less than you invested decreases.
Your questions answered
What are the risks of investing?
Here are some of the risks you could encounter when
The investment opportunity may not suit your needs and
The risk that the purchasing power of your money may be eroded
Interest rate risk
The risk of changing interest rates that may reduce your returns
or cause you to lose money.
The risk of movements in asset markets (share markets, bond
markets, etc) reducing the value of your investment or returns.
Market timing risk
The timing of your investment decisions exposing you to the risk
of lower returns or loss of capital.
Risk of poor diversification
The poor performance of a small number of asset classes can
significantly affect your total portfolio.
The risk that currency movements can affect your investment.
The risk of not being able to access your money quickly or
cheaply when you choose to.
The risk that the institution you invest with may not meet its
obligations (e.g. default on interest payments).
The risk of losing your capital or suffering reduced returns due
to changes in laws and regulations.
The risk involved in borrowing to invest.
What are complex investments?
Complex investments include futures, options, stapled
securities, warrants, contracts for difference (CFDs), and
collateralised debt obligations (CDOs).
We consider these investments 'complex' because they involve
complex financial risks, complex ownership arrangements or complex
rights and obligations.
Complex investment products can be designed so that the value of
your investment moves up and down more suddenly and drastically
than it does with investments like shares or simple managed
For this reason, take extra care to ensure that you understand
the nature of the investment and the risks involved if you're
considering complex investments.
Remember, if you don't get it, don't buy it
What are tax-effective investments?
Shares and property
An investment is tax effective if you end up paying less tax
than you would have paid on another investment that gives you the
Generally, any income you receive from these investments will be
taxed at your marginal rate. If the income is from 'franked'
dividends - that is, dividends paid by an Australian company out of
profits on which it has already paid tax - it will come with a
credit for the tax already paid, called an 'imputation credit'.
If your marginal tax rate is the same as or lower than the
imputation credit, the income from the investment will be tax-free.
Even if your tax rate is higher than the imputation credit, you
will pay less tax on the income than you would have without the
credit. In all cases, the investment is tax-effective.
If you borrow to invest, you may be able to 'negative gear' the
interest on your loan as a tax deduction. To do this, what you pay
in interest must be more than what you earn from the
Tax concessions from your super
The government gives incentives through the tax system to
encourage people to save for retirement. These include:
- taxing investment earnings at 15% or less if offset by
- tax deductions for contributions if you are self-employed (up
to certain limits)
- tax-free benefits for most people over 60
- special tax rates on salary sacrificed super contributions (up
to the contribution caps).
Cash and fixed interest investments
You will pay tax on any income you receive from these
Watch out for 'tax-driven' schemes
Tax schemes generally let you postpone your tax, but you'll
still have to pay tax in the end. They offer tax deductions for
investing in assets that produce an income. As an investor, you
need to be aware that agribusiness schemes usually take a long time
to earn any income (as long as 5 to 20 years).
If there is no income from the scheme, the ATO can decide that a
scheme isn't really intended to be an 'income producing asset' - if
this is the case, the ATO can disallow any tax deductions, and
these need to be paid back. On the other hand, a successful tax
scheme can result in a large unplanned tax bill.
Another issue for investing in agribusiness schemes is that
crops can fail and plants and animals can lose value, so you can
lose some or all of your money - for example, several forestry
schemes failed in 2009.
If you are being advised to invest in a tax scheme, check the
amount of commission your adviser will receive before deciding to
invest, and compare it to the commissions paid for other
investments, such as a managed fund investing in Australian
Develop an investment plan
Developing an investment plan is a crucial step
on the pathway to a secure financial future.
If you get personal financial advice from a licensed financial
adviser, you'll get a written Statement of Advice (SOA) - a
carefully structured plan, personalised to meet your goals, needs
and timeframes. Take time to understand any recommendations and why
the adviser thinks the plan is right for you.
If you want to develop your own plan, start by writing down your
goals or setting up a simple spreadsheet. Think about what you
want, when you want it and why. Work out how much you need to reach
your goals and how much you need to set aside each pay period (for
an example, see below).
Whether you've seen a financial adviser or are developing your
own plan, you'll need to carefully read the information you get in
the Product Disclosure Statement (PDS) or prospectus to assess the
risks, benefits and costs of including a particular financial
product in your plan. A good financial plan will:
- outline your personal financial goals, your financial position
- explain the investment strategy to achieve your goals
- explain the risks and how best to deal with them
- recommend investments to manage your money
- set out all the costs, including any commissions or
Planning for short-term goals
||Your 'between the flags' strategy
- Short holiday
- education course
- elective surgery
- minor home renovation
Save a fixed amount each pay period and/or invest a lump
Choose a cash investment - for example, a high interest savings
or cash management account with a capital guarantee, or a term
With term deposits, watch out for automatic rollovers when the
term expires. The new interest rate may be lower than the original
Many people use credit cards to meet short-term goals but this
can be very costly and keep you in debt instead of helping you
Paying off credit cards and personal loans first will free up
additional cash to save for things you need. Start with debts that
have the highest interest rates.
Case study: Carissa
Carissa is studying, working part-time and saving for a
post-graduation trip. She is extremely cautious in her approach to
Carissa likes the certainty of a secure return, with no risk of
losing her capital. Saving through a bank account suits her just
fine for the moment.
'I know I'm not getting much in the way of interest but
preserving my capital is my main concern. The sharemarket? No way.
It's far too scary.'
Carissa is investing 'between the flags' for her current
situation. Her investment matches her goals and timeframe.
But when she gets a bit older and works out what she wants later
in life, her investment approach will need to change. She'll need
to think about investments such as property and shares which can
offer her both capital growth and tax-effective income.
Planning for medium-term goals
||Your 'between the flags' strategy
- Extended holiday
- home deposit
- major home renovation
Save a fixed amount each pay period and/or invest a lump
Choose a mix of investments that will help grow your capital as
well as give you regular tax-effective income that you can
Decide whether to invest in each of these asset classes
separately yourself or choose a managed fund that offers a
ready-made portfolio (see below).
Avoid borrowing to invest because, over this timeframe, you
cannot reasonably accept the extra risk involved.
Case study: Tom
Tom's goal is to expand his farm by buying the adjoining
property when it becomes available in a few years time. In the
meantime, he wants to supplement his farm income.
Tom put some money from an inheritance into an investment
property on the coast but had trouble renting it. Eventually, he
was forced to sell the property at a loss.
'I'm looking for a regular income, but I'm keen to preserve my
capital if I can. I'm not against putting some money into shares
but I'd probably play it safe by going for one or two 'blue chips'
like the banks and big retailers.'
Tom has already learned one of the key things about
market-related investments: they all carry some level of risk - and
circumstances can change. However, experiencing one loss did not
mean he gave up investing altogether.
To preserve his capital, he needs less exposure to growth assets
such as property and shares. His plan to invest in shares paying
franked dividends will meet his need for tax-effective income but
only 'one or two blue chips' puts his goals at risk. He needs to
Planning for long-term goals (over
||Your 'between the flags' strategy
- Build wealth outside super
- pay for child's education
- grow trust fund for your beneficiaries to inherit
- a weekender property
- a new business
Save a fixed amount each pay period and/or invest a lump super
sum. Add to your investment from extra income at any time.
Choose a mix of investments that will help grow capital as well
as giving you regular tax-effective income that you can
Decide whether to invest in each of these asset classes
separately yourself or choose one or more managed funds that offer
ready-made portfolios (see below).
Seek personal advice about the opportunities and risks of adding
some exposure to international bonds, property and shares,
including the extra risks of fluctuations in currency exchange
If you are thinking about borrowing to invest, seek personal
financial advice, so you can weigh up the risks.
Case study: Carly
Carly's aiming to buy a waterview apartment in a ritzy part of
the city - all before she's 35.
To that end, she is an aggressive saver and investor. She has a
share portfolio and monitors its performance daily. To increase her
returns, she has taken out a loan to buy shares in small companies
that look like the next big thing. 'Investing's fun,' she says,
'and so far I'm winning.'
Carly needs to think about the importance of diversification in
her portfolio in case she takes on too much risk. If there is a
severe market turnaround, the smaller company shares may not
recover their value as quickly as she might hope.
Because she has a loan, she has more at stake and might need to
sell some of her shares or pay more money into her margin loan to
meet loan obligations if the sharemarket falls.
Carly also needs to think about income protection insurance as
her whole strategy depends on maintaining her current high level of
Even if you don't have other investments, you'll almost
certainly have money in super. Super is generally the most
tax-effective way to save for your retirement.
If you're working, super is a painless way of saving and
investing because your employer makes regular payments for you. But
you still need to monitor your investments. And you need to know
that investments in super are usually locked away until you are at
least 55 years old (the minimum 'preservation age').
Case study: Dominic
Dominic has his own small business and likes the independence
this gives him. He invests the profits of his business in his
self-managed super fund (SMSF).
Dominic is focused on the long term and understands that he'll
see the market rise and fall. He's set up his fund to have about
60% in shares, 25% in property, 10% in bonds and 5% in cash. He
likes to do his own research and share trading online.
'If you're prepared to do your homework, there are often
opportunities to do well.'
Dominic is a confident, well-informed investor. In keeping with
his trustee obligations, he has a clear investment strategy for his
SMSF that shows he understands the value of a spread of growth
assets in building wealth for retirement.
Still, he needs to be wary of getting carried away by his own
success. If he makes good profits from share trading, he'll need to
rebalance his portfolio so that it doesn't become too heavily
weighted towards one asset class (such as shares), which would mean
he had taken on more risk than he originally planned.
Riding the wave to retirement
If you're planning on investing for retirement, super is the
perfect place. It offers:
- your choice of fund
- the option to contribute extra at any time
- tax advantages
- time to ride out the ups and downs of the market
- extra life and disability insurance at low cost.
- tax penalties apply if you contribute more money than you are
allowed to in any year
- your super is generally locked away until you retire (or reach
your preservation age) - don't be scammed into thinking you can
access your super early.
Optimising your super benefit
As well as investment performance, three things will affect the
size of your super retirement benefit:
- how much you put in (contributions)
- your investment strategy and the impact of any movements in
financial markets on it
- the fees you are charged.
- For many people, making extra contributions to super can be the
best way to invest. For retirement, your super fund gets tax
concessions on investment earnings, so you usually save more by
investing through super than by investing the same amount outside
- Before deciding on how much and how to contribute, explore your
options and the current tax rules. Higher and middle-income earners
can benefit from extra contributions made from pre-tax income
(salary sacrifice) if their employer allows it. Lower and
middle-income earners can benefit from government co-contributions
by making after-tax contributions.
Your investment strategy
- Most super funds let you choose an investment strategy. You
should choose the strategy that best matches your timeframe and
appetite for risk.
- You also need to review, though not necessarily change, your
strategy when the investment climate changes and you approach
- Make sure that the strategy for your super investments will
still help you achieve your overall investment goals.
The impact of fees
- Every dollar you pay in fees reduces the money available for
investment and ultimately your final benefit. If you pay an extra
1% each year in fees, you could lose up to 20% from your retirement
benefit over 30 years.
- More services can mean higher fees. Having more than one
account may mean you are paying double the fees. Out-of-date or
lost accounts can also cost you money. To check whether or not you
have lost super accounts, go to the ATO
Self-managed super funds
If you're thinking about a self-managed super fund (SMSF), be
aware of the costs, legal duties, and the restrictions on how money
in these funds can be used. Be realistic about the time you have
available to manage your fund, and the expertise you have to do
Find out more
Our booklet Super decisions answers all your questions
about super (including your preservation age and when you can
access super early).
Visit our super section for more
information about SMSFs.
What is diversification?
'Diversification' means spreading your investments so you can
help control the total risk of your investment portfolio.
The aim of diversification is to hold assets that perform
differently to each other so that any losses made on some
investments will be balanced by what you gain on others.
Spread your assets
To benefit from diversification, invest across the major 'asset
classes' - cash, fixed interest, property and shares.
You should follow this principle in developing your financial
plan - and with your super as well (most super funds offer
different options for your investments).
Spread your fund managers
Different fund managers have different styles of investing (see
below). Relying on one fund manager for all your investments may be
placing too big a bet on that manager's success.
Some providers offer multi-manager funds. These allow you to
benefit from the expertise of a number of managers, but still have
only one product to manage.
Spread your markets
The Australian market may not always offer suitable investments
at suitable prices. Investing some of your money overseas may help
reduce the risk of being in only one market. It can also provide
For most investors, investing through a managed fund is the
easiest way to access foreign investments. Investing overseas is
generally more expensive than investing in Australia.
Swings in the value of the Australian dollar against other
currencies may also increase or reduce your investment return. Get
personal financial advice about how to manage these risks.
Spread your timing
Because prices of investments can rise and fall, it can be hard
to pick the right moment to buy or sell.
Even professional fund managers sometimes have trouble knowing
the right time to enter or leave the market.
To reduce the risk of bad timing, invest at regular intervals -
say, every 1, 3, 6 or 12 months.
In this way, sometimes you will pay more, sometimes less for
your investments. The swings in price basically even out over time,
so this practice is called 'dollar cost averaging'.
An easy way to do this is to set up a regular debit from your
cash account to a managed fund.
Chasing last year's winner is difficult and risky
Past performance is not necessarily a guide to performance this
year or the next. This rule applies to individual shares, asset
classes, managed funds and the investment options offered by your
[For diagram of 'Chasing last year's winner is difficult and
risky' please refer to the Investing
between the flags PDF]
Typical investment portfolios
A diversified investment portfolio has a mix of different
investment types or 'asset classes'. Some common labels for
investment mixes include 'conservative', 'balanced' and 'growth'.
But the mixes can vary (even if they have the same label) so you
need to check exactly what you're getting.
In principle, you should choose your asset allocation mix based
on what returns you are looking for, over what timeframe and at
what level of risk.
As the value of investments in your portfolio changes over time,
you will need to rebalance your portfolio to preserve your original
|Mix of investments
||100% in deposits with Australian deposit-taking
||Around 30% in shares and listed property with the
rest in cash and fixed interest
||Around 70% in shares and listed property with the
rest in cash and fixed interest
||Around 85% in shares and listed property with the
rest in cash and fixed interest
|Expected return *
rate is determined primarily by the cash rate **
allows for typical losses in bad years
|Expect a loss
||0 years in 20
||1-2 years in 20
||4 years in 20
||4-5 years in 20
|Value of investing $10,000 after 5
Typically, 'cash' and 'conservative' portfolios would be
suitable for building your wealth over the short term, either
within or outside superannuation. Your choice would depend on your
goals, timeframes and willingness to accept the risk of a negative
Typically, 'balanced' and 'growth' portfolios would be suitable
for building your wealth over the long term, either within or
outside superannuation. Your choice would depend on your goals,
timeframes, willingness to accept the risk of a negative return and
your tolerance for asset price volatility.
Your questions answered
Is this a good time to invest?
If you're thinking of investing, chances are you'll be wondering
'Is this a good time to invest?'
Many investors think that if the sharemarket is booming (a
'bull' market), it must be a good time to buy shares, but if the
market is falling (a 'bear' market) they should stay away or sell
These investors could be right - buying shares on the up is
generally a good idea, and so is minimising losses. However,
depending on the precise timing of the trades, they may be making a
If you buy at the top of the market and sell out when the market
bottoms, you stand to make significant losses.
If you stay away when prices are at rock bottom, fearing further
falls, you could miss out on potential gains when the market
- rising real estate values
- rising company profits
- rising overseas reserves
- rising commodity prices
- rising share prices
- falling interest rates
- positive business and consumer confidence
- low business and consumer confidence
- declining company profits
- rising interest rates
- falling share prices
- falling commodity prices
- falling real estate values
- high rates of company defaults or liquidations
Wise investors understand that the market goes through
Understanding market cycles can help you manage the timing of
your investments and re-adjust your portfolio to minimise risk and
take advantage of opportunities.
For example, when interest rates rise, you may want to put more
money into cash or other 'defensive' assets such as high quality
Remember that market movements can affect even high quality
investments. For example, if you buy a bond and interest rates
rise, you may incur a loss if you need to sell the bond before its
As interest rates fall, it may be time to move more funds into
growth investments - especially if the return from shares in 'blue
chip' companies exceeds what you can get from cash accounts.
Diversification can help you manage the ups and downs of the
market. But no matter what stage the investment cycle is in, your
portfolio needs to be both diversified and reflect your tolerance
[For diagram of 'the investment cycle' please refer to the Investing
between the flags PDF]
Shares: Good and bad years This diagram shows the years from
1900 to 2008 grouped by the percentage of return for Australian
shares. Recent years are shown in bold. While 29 years had negative
returns, over the long term there were 80 years of positive
How do managed funds work?
Managed funds In a managed fund, your money is pooled with money
from other investors. A professional investment manager uses the
money to buy and sell assets on your behalf.
Some funds invest most of their money in a traditional asset
class, such as cash, fixed interest securities, property securities
or shares (Australian or international). Others invest in a mix of
these. A roughly equal mix will result in a 'balanced' fund.
Specialist funds invest in a narrower range of assets such as
infrastructure, natural resources, clean energy, emerging markets
or private equity.
Taking fees and costs into account, you receive the benefit of
any income earned and the value of your investment rises or falls
with the value of the underlying assets.
The manager keeps you up to date with regular statements - for
example, monthly, quarterly or annually - and a guide to completing
your tax return.
Most managed funds are unit trusts. When you invest, your money
buys units in the trust. How many units you get depends on how much
you invest and the unit price at the time.
Say you had $10,000 to invest and the unit price was worth $2:
you would get 5,000 units - or fewer if there's an entry fee.
The unit price reflects the value of the fund's assets so it
generally changes every day. Daily unit prices are available over
the phone or from the fund's website.
You can check the value of your investment in a unit trust at
any time by multiplying the number of units you hold by the daily
(exit) unit price.
Step 4: Decide
how to invest
In the surf, some people are prepared to back
their own skill, fully aware of the risks involved. To decide how
you want to invest, rate your own expertise - then check your
judgement with someone you trust.
When it comes to investing, you need to decide whether you want
to take a 'do-it-yourself' approach or get a professional to do it
for you. Each method has its pros and cons - and you can, of
course, do both. Ultimately, the right approach is the one you feel
most comfortable with.
- You benefit from the skills and knowledge of investment
professionals who make the investment decisions
- It's easy to diversify
- You get access to hard-to-get asset classes such as property or
infrastructure and different investment styles
- You have access to external dispute resolution schemes
- You'll pay fees and charges - even if your investments fall in
- You'll still need to do some homework - for example, there is
no standard formula for a 'balanced' fund so you'll need to check
what's included in each investment mix
Buy and sell direct
- You're in control - you decide when and what to buy and
- If you know what you're doing, you may be able to reduce your
- If you're buying and selling assets such as shares, prices for
these are published regularly, making it easy for you to track how
your investments are performing
- You may overrate your expertise
- It takes time to do your own research
- You may be too casual in your approach
- You may not diversify your investments enough
Investing in managed funds
Many people feel they don't have the expertise or the time to
spend deciding which investments to choose.
Managed funds are a simple and convenient way to invest. You
benefit from the specialist investment knowledge of those who
research and monitor the markets all the time. And you get access
to investments like international shares and property that you'd
find hard to buy yourself.
Managed funds can help you reduce the risk of losing money if
you put too much into one investment. A share fund, for example,
invests in many shares. A balanced fund invests in many shares,
bonds, property and cash securities. This diversification reduces
the risk of them all going bad at once (although it's not removed
Different fund, different style
One advantage of investing in managed funds is that you can
choose funds that have a specific investment approach or style -
another way to diversify.
Index (or 'passive') funds
In these funds, the fund manager buys and sells shares to match
the performance of shares in a specific category or index. The
index could be the 'ASX 200' index or that of a specific sector,
such as energy, financials, industrials or health care.
Because the management style is relatively 'passive' (the aim is
to follow the index), the fees are generally lower than for
actively managed funds.
And because the fund trades a lower proportion of its assets,
you may pay less in capital gains tax on any distributions.
Actively managed funds
In these funds, the fund manager tries to outperform the
The philosophy is that while markets are efficient over the long
term, in the short term they do not always behave 'rationally',
which opens up opportunities.
Because the management style is 'active', the way the
investments are managed will vary from fund to fund. Fees may also
be higher than for index funds.
If an actively managed fund turns over a high proportion of its
assets, you will probably pay more capital gains tax on any
These funds focus on companies that, for reasons other than the
nature of the business and quality of management, are underpriced.
The idea is that because the current market price is lower than is
really justified by their earnings, the market will re-rate its
view of the company, and the company share price will rise.
These funds invest in companies that are likely to prosper
because there may be strong demand for their product or because the
economic climate is favourable. Growth funds tend to be more
volatile - up one day and down the next - so investors should take
a longer investment horizon. They tend to do well when market
trends are moving up.
Buying and selling property
Most people who buy residential or commercial property do so
through a real estate agent. Real estate agents are licensed by
state and territory agencies. The transaction itself should be done
through a solicitor or licensed conveyancer.
Buying and selling shares
Maybe you're a person who doesn't like having to pay others to
do things for you - you'd rather do it yourself. To buy and sell
shares, property securities and other investments on the ASX, you
have two options. You can use a full service broker who will place
your buy and sell orders and give you access to a range of
research, analysis and advice.
Or you can use an online broking service, generally for a lower
fee. While you may have access to a range of investment information
online, you don't get what the full service broker provides -
advice that is tailored to your personal situation and needs.
If you're a first-time share investor, check out the various
'how to' products on the ASX website www.asx.com.au. A good way to
start is to set up a 'virtual' or pretend portfolio and manage it
until you are confident about investing real money - or decide this
isn't for you.
Find out more
The ASX website has a list
of stockbroking firms registered in Australia, and overseas brokers
who can deal in Australian shares. It tells you about the different
types of stockbrokers and how to choose a broker to meet your
Your questions answered
Should I borrow to invest?
There is no way to answer this question without knowing your
specific circumstances and needs. On this question, you must seek
personal financial advice - not advice from a real estate agent,
financial planner or stockbroker keen to make a sale.
While borrowing to invest (gearing) can be an attractive
strategy for some investors, it also adds another layer of
complexity and risk to your investment strategy. The more you
borrow, the more you stand to lose.
If there are good reasons to believe that the value of the
investment and the income it provides will rise, then borrowing
money to buy shares (a margin loan), managed funds or a rental
property may increase your total return.
Part of the benefit may arise because the costs of borrowing are
generally tax deductible.
However, be aware that if you borrow to invest, you have more
money at risk over the short term. You could end up with an overall
loss rather than a gain.
If you feel uncomfortable about borrowing, do not let anyone
talk you into taking the extra risks. Safer alternatives to
borrowing include saving more or giving yourself more time to
achieve what you want.
Before you decide to borrow to invest, ask yourself:
- Do you have a reliable income with a safety net of cash and
- Will you be able to repay the loan even if your investments
- Can you handle increased interest rates or market downturns
like the global financial crisis?
- Have you invested in this sort of asset before and do you
understand its risks?
- Do you understand what a margin call is and the implications
for the investment?
- Can you afford to lose whatever you are using as security for
If you answer NO to any of the above questions, you should avoid
borrowing money to invest.
Implement your plan
You're clear about your goals and values, you
have a strategy that matches your timeframe and you've carefully
considered the risks. Now you can put your plan to work.
Statements of Advice, Product Disclosure Statements, application
forms, contracts, leases...
Like it or not, investing 'between the flags' means paying close
attention to paperwork. Sadly, it's often only when something goes
wrong that an investor goes back and reads carefully something they
were happy to put their signature to. 'I didn't realise that at the
time' is often the painful proof of 20/20 hindsight.
To help get your investment off to a good start, go through the
checklist below for any product you're thinking of investing in.
Don't sign anything until you've ticked every box.
'Between the flags' product checklist
- Get expert advice if you need it - Yes/No
- Check out the provider - Yes/No
- Check out the product - Yes/No
- Assess the risks - Yes/No
- Check the suitability - Yes/No
- Check the fees and charges - Yes/No
- Check legal and tax issues - Yes/No
- Consider estate planning - Yes/No
- Understand your exit strategy - Yes/No
'Between the flags' product checklist
Investing 'between the flags' means making the following checks
before you commit to buying any specific investment product.
Remember, never invest in anything that seems illegal or dodgy.
No exceptions, ever! You could lose all your money. You could risk
tax penalties and even prosecution. You might not be able to get
out of the so-called 'investment' or complain or get help.
Get expert advice if you need it - Yes/No
Have you got personal financial advice? You may not need this
for every investing decision. But you might be uncertain about the
right thing to do or not understand the product you are thinking of
investing in. In this case, we recommend that you seek personal
financial advice from a licensed financial adviser before you
Check out the provider - Yes/No
Are you comfortable with the product issuer? Search the internet
and media about the company and people involved. In many cases, the
issuer must hold an Australian financial services (AFS) licence
issued by ASIC.
Check to see if the company belongs to an association with
strong member standards, operating guidelines and disciplinary
procedures. Did the product issuer approach you, and if so, why?
Beware of any offer that is marketed as a special deal 'just for
you', especially if you have only a short time to decide.
Check out the product - Yes/No
Do you have enough information to understand how the product
works and the associated risks? Read carefully the Product
Disclosure Statement (PDS), prospectus or terms and conditions and
any other information that you receive.
You should be able to describe to a friend or partner how the
product works - how your money will be invested, how the product
will generate returns, and how these will be paid to you.
Ask about anything you don't understand. Make sure you're 100%
satisfied with the answers.
Assess the risks - Yes/No
What risks do products like this generally involve and are there
extra risks with this product? Will your investment be affected by
a major shift in the economy or market sentiment? Recessions,
business failures and gloomy markets do happen, and experienced
investors are properly prepared for them.
What are the potential losses? Are they limited to the amount of
your investment, or could they be even greater? With products such
as contracts for difference (CFDs), your losses (as well as any
gains) could be more than the amount you originally invested. You
could put at risk money you never intended to gamble with.
Check the suitability - Yes/No
Does the product suit your needs? Only buy a financial product
if it's going to meet your needs and fit in with your own knowledge
and experience with money.
Are you at a stage in life when you are confident in your
ability to recover from any financial losses you may suffer? For
example, do you have people relying on you for financial support or
are you investing money you may need in retirement?
Check the fees and charges - Yes/No
What are the commissions, fees or other charges (including
interest if you're borrowing to invest)? All costs (even small
costs spread over time) reduce the return on your money.
Know what you're buying and how you're paying for it. Make sure
you only pay for things that you need or are useful such as
personal financial advice and management.
Check legal and tax issues - Yes/No
Everyone has a unique financial and tax situation. You may need
to get professional advice about how an investment will affect your
A solicitor can explain your legal obligations under any
contract. An accountant can explain any tax benefits which might
help offset costs.
Consider estate planning - Yes/No
What will happen if you die or get incapacitated? Do you have a
will in place? If you're going to give power of attorney to
someone, make sure you trust them to act in your best
Understand your exit strategy - Yes/No
Can you get your money back out of this product if you need to?
Are there any fees if you take it out early? Can you easily sell
your product if you need to?
Some products can be traded readily on the ASX but for other
products you have to wait until they mature. You may have to pay
penalties to get your money back earlier - for example, with a term
deposit, your financial institution can charge you if you want your
money back before the 'term' is up.
Step 6: Monitor
'Set and forget' is not a 'between the flags'
approach to investing. Market and economic conditions, like those
at the beach, can change rapidly - but a panicked reaction can
often make things worse. If your strategy is sound, stay with
Think you can just invest and forget? Think again!
It's important to keep track of your investments - even if you
have a professional adviser. When monitoring your investment
portfolio, remember your investment goals, timeframes and
willingness to accept risk (see above).
Keeping track of performance
Record keeping is an essential part of investing. You need
records for accounting and tax purposes and to assess the
performance of your investments. Records will also help you if you
need to make changes to your investment portfolio.
At the end of each financial year, your super fund(s) will send
you a fully itemised benefits statement. If you invest with a full
service stockbroker, managed fund master trust or a 'wrap'
provider, you'll get transaction statements and periodic reports
showing the value of your investments and any deductions for fees
For managed funds, you'll also receive an end-of-year tax
statement to help you fill in your tax return. For other
investments, you need to keep track of interest and dividends
yourself for tax purposes.
You can monitor your investment portfolio at financial websites
(such as those for the major daily newspapers). You can track the
daily price of shares and units in managed funds and super
Find out more
For market information and company announcements, go to the ASX website.
Looking out for warning signs
Sometimes there are warning signs of unhealthy investments. When
a warning sign is posted, you may need to act quickly to avoid
unacceptable losses. However, there's no guaranteed method to spot
losses in advance. Even the most experienced investors make
Sometimes ASIC and ASX require issuers of investment products to
publish statements clarifying or correcting information given to
investors. The investment may still be suitable, but these warnings
may signal that the investment involves more risk than you want to
take. The problem may have been a genuine oversight but you need to
Advertising by celebrities
Don't let the use of celebrities in advertising distract you
from the real and important information. Always do your homework
and check the fine print.
Repeated over-promising and under-delivery
While even the best managers make mistakes, ongoing
disappointing results, lack of communication and falling service
standards may indicate that something is seriously wrong.
Mistakes, delays, audit qualifications and controversy over
accounts could be warning signs. Accounting rules can be complex
and genuine errors or differences of view do occur. However,
repeated issues may indicate deepseated problems.
Director and senior management in-fighting, resignations,
breaches of the law or unethical conduct are sometimes warning
signs. Changes in management may be necessary, but could take
attention away from responsibilities to investors.
Anyone who ignores danger signs at the beach
does so at their own peril. You need to recognise the danger signs
of financial scams - then look for safer investment waters for your
If you swim between the flags, you'll avoid rips - dangerous
currents that can drag you out to sea. If you invest 'between the
flags', you'll avoid rip-offs - scams that can suck you in to your
Invitations to invest in financial scams come in many different
forms. Some are advertised in newspapers and magazines. They can
also come by email, by phone, on internet sites, chat rooms, by
text message, by post, in seminars or in person.
Unfortunately, scams will always exist as long as there are
people who think there is a fast track to wealth or who fail to
read the 'danger' signs. That's why it's important to know what a
scam might look like. You'll find some key distinguishing features
on the next page.
Case study: Malcolm
Malcolm lost $30,000 'I received an unexpected phone call from
London and took up an offer to invest in offshore options trading
for 2 months.
'The caller explained the details and led me to an
official-looking website. It just didn't occur to me that I could
be the target of a scam.
'If you are cold called (contacted out of the blue), my advice
is that you shouldn't feel pressured into making a rushed decision
and sending any money.
'Step back and take your time to do your homework - don't rely
on glossy brochures, websites, or the assurances of a
How to spot scams
It looks real
Scams that catch people often look realistic and are presented
professionally. They have attractive documents, a business-like
website, and names that sound like reputable companies.
It pressures you to invest
Scammers often say 'don't miss out' and 'act quickly before it's
too late'. They're really just trying to grab your money before you
have a chance to check properly.
It promises bigger or faster profits
Scams often offer a higher return than genuine investments. Some
offer 20% a year, others go for 300% a year or even more. It's too
good to be true. By comparison, Australian shares are some of the
most successful investments, and their value has grown about 7-9% a
year over the long term. Whether it's high or low, never choose an
investment based on return alone.
Trust your commonsense
Check the interest rate on your bank account as a reference
point for realistic returns. If your bank account is only paying
you 4% a year, and a promoter says you can earn 10% income a month,
this is unrealistic and likely to be a scam and high risk.
It promises less effort or risk
Most scams say that financial success is easy and risk isn't a
problem. But real wealth demands planning, hard work and
Even the best investors make mistakes and have to weather storms
like market busts and economic recessions. It promises something
It could be a 'secret' offer, 'inside information' or 'new
techniques' to make you feel like you've got an edge over other
people. But chances are it's a fairytale - and it won't have a
How to protect yourself from financial scams
- Remember the golden rule - if it sounds too good to be true, it
probably is too good to be true.
- Say 'no' to promoters who call you out of the blue, to anything
you don't understand, or to anything illegal. Always get a
prospectus or Product Disclosure Statement (PDS).
- Deal only with financial advisers licensed in Australia. You
can check an adviser on ASIC's financial advisers
- Learn to love your paperwork - review your investments
regularly to track their progress.
- Check tax claims made by scheme promoters so you know who's
making the offer and why.
Misleading advertising? Hard sell?
Have you come across an advertisement for a financial product
that you think is misleading?
Have you been pressured by a sales person to make a decision
when you didn't have enough information, or weren't sure that the
product was right for you?
Phone ASIC on 1300 300 630 to tell us about it. You can lodge a
complaint at ASIC's MoneySmart.
For strategies to help you resist pressure selling, so you don't
end up investing in a financial product that doesn't suit your
needs, see protect yourself from scams.
ASIC would like to thank Surf
Life Saving Australia (SLSA) for supporting our use of the
'between the flags' message. SLSA's red and yellow flags are an
internationally recognised symbol of patrolled beaches and
therefore promote safety awareness. For further information about
SLSA or to support its work, please visit their website.
ASIC also acknowledges the work of DFA Australia Limited in
providing educational articles to financial advisers under the
banner of 'outside the flags'. We welcome efforts to educate and
inform both industry and investors about the fundamental principles
of wiser and safer investing behaviour.
The Australian Securities and Investments Commission (ASIC)
regulates financial advice and financial products (including
ASIC's MoneySmart website helps you make smart choices about
your personal finances. It offers calculators and tips to give you
fast answers to your money questions.
Visit ASIC's MoneySmart website or call ASIC's Infoline on 1300
Last updated: 24 Oct 2018