Understanding how investments work.

Our goal is to make the best financial moves for our members. We also believe in helping our members learn and understand how money works and how you can take control of your financial future.

If you feel a little lost when it comes to understanding how investments work, don’t worry, you’re not alone. But understanding money and the way investments work can make building your retirement savings easier. Let’s explore the basics of investing.

Learn more about investing

Learning the basics of money management and the ways you can use your existing super to build a larger nest egg can have a big impact on your retirement.

Asset classes

Assets can earn you money. That’s the bottom line.

In investment terms, an asset is an investment used to gain a return. Assets are generally divided into asset classes such as cash, fixed income, property, infrastructure, equity and other (alternatives).

Risk and return

Risk and return are linked. In general, the lower the risk, the lower the expected return (or the lower the likelihood of a negative return). If you want to try for a higher possible return, you face increased risk and also expose your investments to a higher possibility of making a loss.

By using different asset classes you can mix higher risk investments with lower risk investments to provide you with the growth you want and the risk you’re comfortable with.

Investment styles

Just as there are different classes of assets, there are different styles of investment.

• Passive. Also known as index management. Seeks to equal a stock market index performance. (like the S&P/ASX100, for example)
• Active.  Aims to beat a market index benchmark performance through asset allocation and careful selection of investments.
• Enhanced Passive. The benefits of active management but with the risk controls of passive management.
• Growth. The focus is on long-term growth over short-term capital gains.
• Value. The aim is to discover temporarily under-valued assets and take profits when they become over-priced. A key tool is the price-earnings ratio valuation.
• Top-down. A style that looks at the larger financial market and its effect on industry sectors before looking at individual stocks.
• Bottom-up. A style that looks first at the performance of individual companies then compares them to their industry sector and finally the larger financial market.

Diversification

As the saying goes, it doesn’t pay to put all your eggs in one basket. The same is true for investing. The key to successfully managing risk is through diversification. 

Diversification means spreading your investments across a range of different styles so you have exposure to different asset classes. This could help offset poor performance that may occur in any individual asset class. For example, if one asset class is not performing well, another asset class may be experiencing better returns, helping to offset the losses of the poorer performing asset class.

If you’d like to learn more about diversification and other investment strategies, you may benefit from an appointment with a Hostplus financial planner. Hostplus members can take advantage of a no cost, no obligation initial appointment.