My partner and I have a few of term deposits with banks. One has just matured so we have about $15,000 that we want to use, possibly to invest in the stock market. Should we be investing in blue chip stocks or buy more less well-known stocks at a lower price, in the hopes of seeing higher returns? We don't want to throw this money away but were hoping for a higher rate of return than term deposits.
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Great question, and it's certainly one we see on a regular basis. When building a plan, we typically see that your investment choices are shares, property and lending and that our preference is for our clients to have some of each, rather than all of one thing. It's kind of like whether swimming is better for you than running? The truth is that they are both good for you, and you should do some of each.
Shares and property are investments that typically provide investors with access to a growing income stream, and capital growth over the medium to long term. Shares and property are what we call growth assets and you need to hold onto them for more than five years.
The other type of investment choice is what we call loans, and that's precisely what your term deposit is. The reason we call it a loan is that you are lending your money to the bank, and in return expect to receive a rate of interest and your monies to be protected. We typically recommend that clients have not less than three months of living expenses in loans (cash and term deposits) and for the balance to be invested with a longer time horizon in growth assets.
What this means is that if you won't need to access your $15,000 for five plus years, we would recommend that you start with a diversified portfolio of Australian and Global Shares. That does not mean that you need to go out and select individual companies, and can do so by investing in a managed fund. If this is the first time you have invested in shares, you might want to consider a strategy called dollar cost averaging where you invest a fixed sum each and every month. That way the strategy can do the heavy lifting for you, and you can make investing a habit.
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