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Your Hudson financial adviser can help you construct an investment portfolio that is most appropriate for your situation, your risk profile and your long-term goals.

A properly balanced and diversified portfolio should contain a mix of shares, managed funds and property to reduce the impact of market volatility.

What are the three main types of investments

Property, shares and managed funds are three of the main types of investment and Hudson Financial Planning have almost 30 years of experience providing advice relating to all three. An investor who wants to spread risk and diversify should consider investing in all three areas.

Property is often the first investment to consider for many investors, because it is generally “larger scale” and if you invest in shares before considering investing in property, you may rule yourself out of being able to invest in a quality property. If you invest in property first, shares on the other hand, can be invested into on almost any scale. The key benefit of property is the ability to leverage and as such significantly amplify your returns. Banks are generally prepared to lend for property with as little as 5% or 10% deposit, the usual deposit being 20%. With shares on the other hand, although you can leverage into them using only the shares themselves, the banks may only be prepared to double your exposure, unless for example you use a property as collateral.

Historically property has been one of the greatest assets in terms of experiencing capital growth, with thousands of investors buying property 25 or 30 years ago for say, $100,000, that is now ten times that or more. It is also a very tax effective investment, due to the vast array of expenses that can be claimed against them to reduce the impact of tax on the income generated. Property can even be “negatively geared”. This is whereby the expenses outweigh the income and as a result your taxable income reduces by the difference and you receive a tax rebate at the end of the financial year.

Choosing what to buy and where when it comes to an investment property is no easy task and seeking advice is paramount to securing a quality investment that will achieve capital growth. Considerations include the level of local amenities, distance to schools and train stations, the desirability from prospective tenants, the “uniqueness” of the property. All of these things impact the demand to live in the property which directly impacts the value.

Shares are another great way to invest. Shares are effectively owning a tiny portion of a company and they can be bought over an “exchange”. Historically the Australian (and most other countries) share market has returned around 10% p/a over the long-term. Most of this is made up of capital growth and partly from “dividends” which are an annual income paid the company you’ve purchased a share in. The beauty of shares is that you can invest as much or as little as you wish. As with property, doing your due diligence is important and it is equally important to seek advice. It’s also very important to diversify when it comes to shares, because ANY company you buy a share could, in theory, continue to decline and could eventually go into liquidation and close down. This is known as “company specific risk”.

Managed Funds are a great way to reduce company specific risk. Managed funds are platforms whereby an investor pools peoples money and buys many shares, sometimes thousands of them. The total value of these shares is reflected by what’s known as the “unit price”. As the shares continue to pay income and continue to rise in value, the unit price rises and the investors portion is worth more. Like shares they usually pay an income, not known as a dividend, but as a “distribution”. Managed funds usually have a specific focus. They may target a particular country/countries, or they may target a particular sector within a country. They can be actively managed where the fund manager is constantly changing the portfolio, selling down shares they think may decline in value and purchasing shares they think will increase in value.

Due to the vast range of options when it comes to managed funds, seeking advice from an adviser is paramount to success. An adviser uses research houses to make sure they recommend fund managers that have a proven history of success. They can also make sure the level of risk is appropriate to the appetite for the risk of the investor and also their situation (age, income etc).

The basics of investing in shares

Share markets enable people to invest in companies. Buying shares in a company means that you own a part of that company. You may receive part of the profits as dividends and share in the growth of the company’s value.

Companies will list on the share market to raise capital to expand their business as an alternative to borrowing. Long-term investors anticipate that the share price of a company will appreciate, but should be aware that prices fluctuate.

Stock/share categories

Cyclical Stocks — Companies in industries or markets highly subject to macro-economic cycles (e.g. building and construction), or companies supplying to those industries. These stocks have an elastic price sensitivity.

Defensive Stocks — Opposite to cyclical, these are the suppliers of essential items (e.g. food and beverage, fuel) that are not subject to macro-economic cycles. As such these stocks have an in-elastic price sensitivity.

Banking and Financials

Resources

Technology, Media and Telecommunications

The benefits of investing in shares

  • Growth prospects — through increases in share value.
  • Income — through the payment of dividends.
  • Tax effective — many Australian shares pay franked dividends providing imputation credits (tax rebates).
  • Liquidity and flexibility — most shares can be quickly and easily sold, with funds available in a few days.
  • Diversification — shares listed on the Australian Stock Exchange range from quality blue chip companies to speculative and developing companies.
  • Small minimum investment — you can start with as little as $2,000 (recommended minimum investment).

The risks of investing in shares

  • When buying shares in a company you buy into both the positive and negative financial experiences of that company.
  • Listed companies may fall into financial difficulty and there is some risk that a company may be taken over (which is not always negative for shareholders) or placed into liquidation.
  • Share prices can fluctuate subject to market forces and may experience a drop in value.
  • If the share price falls and you sell, you will lose money. Although there can be tax rebates from investing in shares, investors may also be subject to paying Capital Gains Tax (CGT) on their investment returns.

What is a managed fund and how does it work?

In a managed fund, your money is pooled together with other investors. A third party manager then buys and sells shares or other assets on your behalf.

You are usually paid income or ‘distributions’ periodically. The value of your investment will rise or fall with the value of the underlying assets.

What are the positives of investing in a managed fund?

  • Offer diversification
  • Can access a broad range of assets or markets with a relatively small amount of cash
  • Allow you to make regular contributions
  • Reduce paperwork and make completing your tax return easier

The risks of investing in managed funds

  • Market Risk – the performance of a managed fund will be dependent on the performance of the
    underlying assets the fund is investing in. As a result, poor performance of an asset class such as
    shares will be directly reflected in the value of the units in the managed fund. This may relate to
    a particular sector, such as property or small companies.
  • Fund Manager Risk – the investment decisions made within a managed fund are the direct
    responsibility of the fund manager. The quality of the decisions made will be reflected in the
    unit price of the managed fund. A fund manager should have a defined investment technique,
    sufficient experience in the market into which they are investing and a defined investment
    strategy. There is key person risk in this regard, in that key staff and decision makers may resign
    from their position and no longer assist in running the fund.
  • Gearing Risk (if funds were borrowed to invest) – Gearing magnifies gains but it also magnifies
    losses. If the investment returns are less than the gearing costs, the borrower may be unable to
    service the loan. If so, selling some assets might be required to avoid default and it could be in
    inopportune time to sell should this occur, i.e. it may crystalise losses.
  • Legislative Risk is the possibility that a change in legislation will impact the appropriateness of
    certain investments for your strategy. Legislative risks are inherently difficult to measure, but
    are commonly related but not limited to the taxation treatment of certain investments.

Step by Step process for investing in the sharemarket

Step 1: Reach out to one of Hudson’s friendly and expert financial advisers by calling 1800 804 296 to book an initial meeting via telephone or zoom. Matt Paul is our Operations Manager and he will co-ordinate a time with you and at the same time send out a copy of our Financial Services Agreement (FSG).

Step 2: Our adviser will call you at the appointment time and this is where we will get to know you a little better, talk about your tolerance to risk and return and consider the difference between shares and managed funds and what suits your particular situation. Whatever the reason for reaching out to us, we will find the best way to help you in the appointment and will quote the appropriate fees.

Step 3: Once fees have been agreed upon, we will ask you to fill out a full personal financial profile. Your adviser will analyse the information and will make another time to talk you through different strategy options.

Step 4: A strategy will then be presented. This may be product specific, or it may be a full financial plan.

Step 5: Once you are happy with the Strategy presented, it will be implemented, and we will confirm once everything is in place.

Step 6: We will then provide ongoing support to help you navigate through the financial complexities associated with each stage of life. Adapting to your changing needs is the key to long term success. As part of your initial agreement, we will have annual, biannual or quarterly reviews, but we are always here is you need to speak to us or if your circumstances change.

At Hudson we have an intimate knowledge and love of all things financial. This gives us the enthusiasm and desire to help you and we will go to great lengths to help you achieve your goals. We are committed to providing you with the best service possible to achieve a result that will set you up for the rest of your life.

Contact Hudson for Investment Advice today

The right investment can be an integral part of your wealth creation process.

Consider working with Hudson Financial Planning as your investment adviser for all your future investments. Speak with your adviser about investing in shares and managed funds on 1800 804 296 about this in more detail or enquire online. with us today.

FAQs for Investment Advice 

Discover our most commonly asked questions relating to investment advice at Hudson.

Should I invest in Property or Shares?

Both are excellent investments with the potential to provide income and capital growth. Ideally a
person would invest in both categories to reduce overall volatility, as the share market and the
property do not always move in tandem. Property can be a great option for someone who already
has significant share exposure in their Super. Due to the costs of both buying and selling property, it
may suit someone that has the required timeframe (10+ years) to ride through property cycles and
make it profitable. Property also allows maximum leverage, in fact if you have the risk tolerance for
it, the more the bank will lend you, the more you can invest into the property market. You cannot
get this sort of leverage with shares. Shares can be a great investment for retirees because they are
very liquid and can be sold off periodically to provide an income. Shares are also a great investment
for clients who want to average into the market. This is a great investment strategy and it helps to
mitigate market risk. You can’t buy in monthly to the direct property market. In a diversified, well
planned portfolio, shares and property should both feature.

Should I invest with a managed fund or in the share market?

I think this question partly depends on the amount of cash you are looking to invest. If its under
$50,000 then managed funds are the best option. This is because a managed fund will allow for
better diversification, Above this, it is a matter of preference, or maybe it’s a combination of both
that you are looking for.

Buying shares directly can suit those that want to be in complete control of what they buy, and it’s a
bit more exciting than purchasing a managed fund…who doesn’t want to own Apple or Netflix? Once
purchased they tend not to have any form of ongoing cost associated. However the initial costs can
be expensive because there is a “brokerage” charge for each share purchased, and to have a fully
diversified portfolio across different asset classes (because different asset classes do well at different
times) it can be costly. Managed funds are a great way to reduce this brokerage because one fund
might then purchase 100 or even 1,000 companies, providing excellent diversification.

Using managed funds allows you to access different sectors which may be hard to directly invest into, like
Asia, the US(where there is also currency risk), small cap companies, property trust, infrastructure
funds and many other boutique funds. This can add an element of risk and therefore possibly higher
returns, to a portfolio, and using managed funds is often a much cheaper and easier alternative than
investing in these boutique markets yourself. Buying blue chip shares and diversifying with some
managed funds in different sectors is a strategy to consider for clients who love to own shares.

What kind of shares are the best to invest in?

There is no right or wrong answer here because the markets are constantly changing. There are
times when rising commodity prices might result in resource stocks doing well. At other times, the
financial sector or the pharmaceuticals sector might outperform the market at large. The important
thing to remember is that if you diversify you can reduce overall volatility. Buying into 6 or 7
different sectors means that if one sector does struggle, it will reduce the impact on your portfolio.

Can you lose money in a managed fund?

Yes, like shares, the value of managed funds can fall, especially in the short-term. Due to the
diversified nature of managed funds however, they generally return to value (and beyond) in the
medium to long-term. That’s why it’s important to have a long-term outlook with managed funds
and the ability to service any debt repayments associated if you have borrowed to invest.

What is the minimum amount needed to invest in a managed fund?

You can start a managed fund portfolio with as little as $5,000, perhaps less if you commit to a
monthly contribution.

What has better returns, share or managed fund investing?

In theory, the returns from shares are very similar to that of managed funds, because managed
funds are simply an amalgamation of a large number of individual shares. Where shares often
provide income in the form of dividends, managed funds generally pay an income at regular
intervals, known as “distributions”, which are generally various dividends and also potentially some
realised capital gains if shares within the fund have been sold.
How much does an investment adviser charge?

Advisers will usually charge a one-off fee to prepare and implement advice. The amount will depend
on the complexity of the advice being prepared. If regular, ongoing advice is appropriate and
advantageous to the client, they may also suggest engaging an ongoing fee so that they can continue
to provide advice relating to an investment account and recommend changes as opportunities
present themselves.

Should I hire an investment adviser or plan it alone?

Unless you are an experienced investor, you should engage the service of an investment adviser.
Advisers such as Hudson’s financial advisers have years and years of experience, giving them the
necessary tools to create appropriate investments depending on the client’s situation. They have
tools and software at their disposal to forecast and plan ahead for a clients future needs. They use
research houses to make sure fund managers continue to perform well. They stay abreast of
changing market conditions to make sure the investments continue to perform and changing
legislation such as tax related changes to make sure clients are minimising tax implications. Our
advisers spend years studying at university in order to get the qualifications needed to help you plan
for your future. What you do with your money is such an important part of your life, even if you
want to give it all away, it’s your money and what you do with it should be your decision, why not
use an adviser to guide you to where you want to be.