Why You Need Property, Shares and Cash.

In the last five years, bank deposits grew from $200b to $550b.  The market capitalisation of shares fell from $1.6trillion to $1.2trillion.  Fairly obvious why, investors were averse to risk.

There are three basic considerations with investments: goals, timeframe and risk tolerance.

A goal tells you much how much you need to save and how much the savings must earn to get there.

Timeframe dictates where the money goes.  Bank deposits are short-term (ready access, government protected).  Shares and property are long-term, think ten years.

This is where appetite for risk comes in.  Short term, shares can fluctuate wildly.  Over the long term, shares average higher returns than cash; over the last 10 years, 9.1% for shares compared with cash at 5.4%.

This is not an either/or argument.  Strong investment portfolios are diversified with a matrix of goals, timeframes and risk, meaning a mix of cash, shares, property and bonds.  It is also prudent to support the plan with appropriate insurances, this provides liquidity at a time required.

Traditionally, younger investors should weight towards growth investments, those near retirement a weight towards cash because for them there is not the time to wait out large falls in shares.

Economies and opportunities change.  Look ahead and consider investments against goals, timeframes and risk.  The ATO now requires self managed superannuation funds to review their investment strategy annually.  We'll follow this up soon, but it comes down to goals, timeframe and risk.

The outlook for 2013 is cautious optimism although there may be bouts of volatility.  Various forecasters expect growth assets to perform well over the next three years.

So, what for the next couple of years?  Business is improving, profits are steady, even rising, so shares will do better.  As the economy improves, interest rates will rise too (so don't lock in now for long terms).  Demand for property is picking up.  On the downside, equities may even reverse in the near future, more property owners will be hurt by any interest rises so there will be good buying for a while yet, and there are so many variables to consider in terms of goals, timing, and risk.

And overall, politicians everywhere know everything, only do the right things, and just want to help you.  Yeah, right!