I will receive a reasonable inheritance in the not too distant future (around $500K). We own our home and don't really want to invest further in the share or property markets as we're wary of the next "crash" in both. My wife and I don't "need" the money for the next 10 or 20 years. We're mid 40's with 2 kids in primary school, combined annual income of around $200K gross. Aside from topping up super, what other "safe" or low risk investments are available?
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Thank you for your question.
To effectively address this question, you must be very clear on your goals and what risk means to you, personally. You then need to consider where to invest (structure) and how to invest (assets and risk).
You have defined your investment timeframe as a minimum of 10-20 years and this long-term investment horizon does have an impact on what risk means to you.
I will interpret your goal as "I want to invest my inheritance for long term growth whilst minimising the risk of permanent capital loss."
Within this context, I would suggest you will certainly be looking to achieve some growth from your investments.
Before considering how to invest, it is important to consider the structure of your investments. If you can structure your investments in a lower tax environment, your returns will be improved without taking on additional risk.
One option, as you have identified, is the superannuation environment. It is important to understand that superannuation is just that - a tax effective investment environment. The actual investments within superannuation are subject to the same investment risks as those held personally. If your timeframe is 20+ years, maximising the use of the superannuation environment is likely to be a very beneficial option. However, if there is a chance you may need access to funds in 10 years, this may not be appropriate due to the restrictions to accessing superannuation savings.
Other options include structuring investments in the name of the lower income earner if applicable or potentially utilising a trust structure to optimise your tax position.
Risk is spoken about in investment markets as interchangeable with volatility (or the short-term price movements of a particular investment). As you do not require access to the funds for at least 10 years, I would argue short term volatility is not the key risk for you.
A negative outcome would be permanent loss of capital i.e. the value of your investment/s being lower in 10 or 20 years when you anticipate requiring the funds. Another risk is not being able to meet your broader personal objectives (such as retirement funding) due to the erosion of value from sub-par investment returns and the impact of inflation.
Investing, by definition, involves some level of risk. When thinking about risk on a scale from cash as least ‘risky’ to growth assets such as shares and property as most ‘risky’, you should expect to be rewarded for investing in growth assets with higher long-term returns.
Managing risk - diversification
There are many tools that can be used to reduce volatility by diversifying your investment exposure, utilising experts and taking an active approach to the management of your investments.
It is also important to think about your investment opportunity not simply as ‘the market.’ For example, within ‘the share markets’ there are many thousands of individual companies that can be invested in.
A diversified portfolio will be invested across both Australian and Global companies (in the form of shares), and may also have exposure to property, infrastructure, debt markets and other alternative investment options.
In addition, strategies can incorporate a level of protection in the form of some investments that can profit from falling prices or market neutral strategies. Currency positioning and the active use of cash within your portfolio can also further reduce the volatility of your portfolio.
Finally, addressing the core of your question. Yes, there are some other ‘safe’ investment options out there. You can keep your funds in cash or invest in an income stream product and you will be compensated with relatively low returns. In your case, you have a long-term time horizon and no immediate need to draw an income from your investments. A diversified, actively managed portfolio with a reasonable exposure to growth assets should provide a significantly improved outcome within the timeframe compared with the ‘safe’ alternatives.
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