Latest financial insights

Key Takeaways

• ‍An Investment Policy Statement (IPS) provides a clear governance framework for NFP investment decisions.‍
• NFP Boards have a fiduciary responsibility to protect assets and align investments with the organisation’s mission.‍
• A well-structured IPS defines risk appetite, asset allocation and constraints, including ethical and SRI considerations.‍
• Clear monitoring, reporting and adviser involvement help ensure long-term investment discipline.‍
• A robust IPS supports better use of reserves and working capital in a challenging funding environment.

Why NFPs Need an Investment Policy Statement (IPS)

Many Not-for-Profit (NFP) Boards face the increasing challenge of delivering on their mission with less operating cash flow. There are many reasons for the reduction in cash flow including lower funding/donations, rising operating costs and many more.

Often, a focus on more efficient use of working capital and reserves can be part of the solution. As Boards search for a better return on funds, it’s a good reminder of what the ACNC requirements are. You can read a full copy of the Guide on the Australian Charities and Not-for-profits Commission website.

All NFP organisations are unique and regardless of their size, cause or association, should develop an Investment Policy Statement (IPS) that is robust and functional, as well as flexible enough to cater for both Board and organisational change and to meet the long-term goals of the organisation in an ever-changing environment.

The Board of a NFP has a fiduciary responsibility to protect the organisation's assets and ensure that its operations and activities use the assets to further the NFPs mission. Therefore, an IPS is critical.

What Is an Investment Policy Statement?

An IPS is essentially a roadmap for funds management; it sets the ground rules for investing and outlines how investment decisions will be made and what steps must be taken to ensure good governance.

It also helps link values, mission and operational needs to the organisations’ financial resources. A good IPS is clear and functional and does not need to be overly complicated nor legalistic.

It should articulate the governance of the funds, define how the funds are to be invested and confirm what outcomes are expected in terms of returns. It should also clarify any constraints that need to be in place.

Many NFPs have ethical and SRI overlays that restrict investment in certain sectors, activities or companies, for example alcohol and tobacco; these restrictions need to be included in the IPS.

A robust IPS will provide certainty that investment decisions are being made in-line with the NFP’s stated risk appetite. Stakeholders should be able to go to the IPS, understand exactly how funds are invested and the governance structure in place.

What Needs to Be Considered in an IPS?

Purpose of the Investment Assets

• What is the purpose for the investment assets?

Roles and Responsibilities

• Who does what?
• Risk profile

Investment Framework

Types of securities in which the organisation can invest:

• Cash
• Bonds
• Shares
• Managed Funds

Quality and maturity of fixed income securities

SRI – Socially Responsible Investing

Target return e.g. a total return on investments of CPI + 3% (risk profile dependent)

Types of investments in which the organisation may not invest:

e.g. XYZ Organisation will not invest in securities purchased on margin, options, futures or other derivative instruments

Asset diversification including a Strategic Asset Allocation (SAA)

Investment Monitoring and Reporting

• The use of professional financial advisers
• Reporting framework and cycle
• Portfolio monitoring and rebalancing to SAA should be adopted as a risk-management strategy.

Supporting NFP Investment Outcomes

There is a lot to consider for a NFP Board when designing, implementing and managing an investment portfolio.

Morgans works with clients in the NFP sector helping them navigate the road to higher returns. We have considerable experience working with large and small organisations and will tailor solutions specific to the NFP’s needs and circumstances.

Get Professional Support for Your NFP Investment Strategy

Designing and managing an investment strategy for a Not-for-Profit requires clarity, discipline and the right advice.

To learn more about how NFP organisations can earn a greater return while understanding and managing risk, speak with a Morgans adviser who understands the unique governance and investment needs of the NFP sector.

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FAQs About Investment Policy Statements for NFPs

What is an Investment Policy Statement (IPS) for a Not-for-Profit?

An IPS is a formal document that outlines how an NFP’s funds are managed, including governance, risk tolerance, asset allocation, ethical constraints and reporting requirements.

Is an IPS required for NFP organisations in Australia?

While not always legally mandatory, an IPS supports ACNC governance expectations and helps Boards demonstrate they are meeting fiduciary duties and acting in the best interests of the organisation.

How does an IPS support good governance?

An IPS provides clarity around decision-making, accountability and risk management. It ensures investment decisions are consistent, transparent and aligned with the organisation’s mission.

Should ethical or SRI restrictions be included in an IPS?

Yes. If an NFP has ethical, social or mission-based investment restrictions, these should be clearly documented in the IPS to guide investment decisions and adviser recommendations.

How often should an IPS be reviewed?

An IPS should be reviewed regularly and whenever there is a significant change in the organisations' objectives, financial position, Board composition or market conditions.

Retirement Investment Planning

It's never too early to start planning for retirement. Now is the time to start thinking about wealth preservation.

Areas of concern

The major issues facing retirees can be summarised as:

• longevity - "how long will I live for, and will my capital last?"
• inflation - "will my money be able to retain its spending power"
• income - "from where will my income be sourced?"

Longevity

Our life expectancies are increasing over time. This trend is rapidly rising due to the amazing amount of medical breakthroughs we are experiencing, as well as our increased knowledge on better living through diet and exercise.

The problem is that as we live for a longer period of time we also need to support ourselves for longer in retirement. There are no guarantees on how long our assets will last.

Inflation

The second most important issue is whether our capital can keep pace with inflation. High-inflationary periods can erode capital over time if we have not allowed for sufficient exposure to growth assets. Having a large allocation to cash can actually be detrimental to an investment portfolio over the longer term.

To keep pace with cost of living increases over time, therefore, it is imperative an investment portfolio has some exposure to growth-type assets (such as Australian and international shares, and property). Just how much exposure will depend on each individual's aversion to risk.

Income

The three main sources of income in retirement are:

• superannuation – in the form of a pension income stream and/or lump sum withdrawals.
• non-superannuation assets - in the form of returns from shares, property, cash and fixed interest.
• Centrelink - that is, age pension benefits

The capital required to provide the income from these sources (excluding Centrelink) will vary depending on how much you need in retirement, your age at retirement and how long you think you will need the funds to last.

How long you continue to derive income from your saved capital will depend on how much you spend each year – and how much you actually "spend" could be different to what you had "planned".

Of course, Centrelink is there to supplement your other income if your financial position qualifies you for a full or part age pension payment. However, there should be an attempt in your retirement planning to minimise dependency on Centrelink benefits. This mitigates any regulatory risk in relation to potential Government policy changes in the future.

Retirement portfolio strategies

How can you maximise your income and capital position? Consider the following tips.

For defensive assets

• During market uncertainty try to hold at least three years of income payments in cash, preferably in a higher yielding account. This should provide ample time to reflect on current markets and to ensure you do not need to draw down on capital to fund superannuation pension payments. It avoids having to sell down assets in low market periods.
• Within the 3 year cash allocation, consider having two years of payments in short term money market investments. These pay slightly higher rates than normal "at call" cash accounts.
• Maintain diversification of income assets with some potential for growth. There are a number of quality fixed interest investments available that pay reasonable income with some equity characteristics but without the same degree of risk.
• Try to draw down from defensive assets if extra funds are needed. Your aim is to preserve capital so if you need additional funds to cover larger lump sum expenses draw from your defensive assets where possible.

For growth assets

• Maintain your growth assets for at least five to seven years without accessing them. Your objective here is to achieve reasonable growth to manage longevity issues.
• Maintain a good spread of growth assets. Diversification across various sectors is the key to minimising capital losses during volatile periods.
• Consider some capital protection strategies if required.
• Take advantage of shares that offer franking credits. The pension phase in super is a tax free environment, which means franking credits are fully refunded back into the account. The long term compounding benefits of this to your account balance can be significant.
• Review your portfolio and rebalance regularly as required to ensure your desired asset allocation is maintained. This is the best way to ensure your portfolio continues to meet your objectives for risk and return.

Investing

Asset allocation

Successful asset allocation means achieving your objectives with the least possible risk. To do this you need to understand the behaviour of asset classes and products.

Establishing an asset allocation that is consistent with your goals and risk tolerance should be your top priority.

Borrowing to invest

Due to the long-term nature and inherent risks of borrowing, it may not be an appropriate strategy if you are already in retirement.

However, most investors in this age group understand market conditions more, and have experienced the ups and downs that come with share markets. They are therefore more inclined to take a little more risk with their investment dollars.

Borrowing to invest is not without risk and when markets fall it is very important you keep in touch with your adviser so that you can both manage your loans as effectively as possible.

Risk profiles can change over time

Getting your investment risk profile right is very important. When you meet with your adviser, he or she will generally discuss your attitude towards investing and how much risk you think you can tolerate. A risk profile questionnaire helps determine this.

However, remember that your risk profile may change over time particularly as you near retirement. Your investment outlook could change from growth to more income-type investments. This is why it is important to re-assess your position on a regular basis.

Understanding the risk/return trade-off for the various asset sectors is very important. That is, the greater the returns, the greater the risk you take; and vice versa. Everyone wants nirvana – where risk is low and returns are high – but this is near impossible to achieve.

Putting risk/return trade-off into more perspective, defensive assets such as cash and fixed interest pay relatively good income, but have no growth and therefore low risk. Shares on the other hand have high potential for capital growth and so the risk factor is also higher.

Debt management

At this stage of your life, most of your personal debt – your mortgage, personal loans, credit cards – would be under control or even eliminated.

For those who still have a mortgage or other personal debt, now is the time to pay it out. Or at least manage your debt within your retirement savings strategy.

With the changes to superannuation rules, many people are reconsidering the traditional strategy of using available cash to repay their debt as soon as possible. Instead, they are converting the debt to interest-only and using the freed up cash to contribute to their superannuation account.

At retirement, a lump sum benefit is withdrawn - tax free if over age 60 - which is then used to retire the debt completely. This can be a very effective method for some.

However, before you consider this strategy it is very important you seek advice from your financial adviser, who will work out whether this is the best plan for your circumstances. In some instances it may still be better to stick with tradition and concentrate on repaying your debt sooner.

Wealth protection

In these later years, with your debts paid off, your main focus tends to be on health and having adequate income.

If something happened unexpectedly, the main concern would be day to day living expenses and medical costs during recovery. Making major changes after illness, such as home modifications, may also be a financial outlay that would need to be covered.

Your options

Trauma and TPD cover remains a priority for retirees as the lump sum benefit can help if you have been diagnosed with a critical illness. This lump sum could be used to make alterations to your residence or car, and to cover medical or remedial costs.

Life cover can supplement superannuation benefits or other income for a non-working spouse in the event of a death of the primary income earner.

Circumstances change with your stages of life so you should talk to an adviser about what product and features suit your needs.

Centrelink issues

Centrelink benefits are available for eligible seniors who have retired or are about to retire. Eligibility is based on two tests – the Incomes Test and the Assets Test. Your financial position (combined if a couple) is taken into account for these two tests, and eligibility for benefit payments is determined by the outcome of these tests.

We recommend you visit the ‘Retirement years' on the Services Australia website. This page is a very useful guide to help individuals understand income support, what additional services and supplements are available and how you can make a claim. It also discusses residential aged care for those who are looking at their options for retirement homes..

Estate planning

Estate planning is an area that can be easily neglected. Individuals often overlook the importance of having an up to date Will and Powers of Attorney.

Estate planning focuses on wealth preservation and wealth transfer so regardless of whether times are good or bad, your objective should still be to distribute your wealth to your nominated beneficiaries in the most effective way.

As well as your Will and Powers of Attorney, you should also be thinking about:

• Superannuation does not automatically come under the scope of your Will unless specifically nominating your Estate as the beneficiary. For this reason you need to establish additional nominations for your superannuation.
• Business succession planning - if you have a business you should have a business succession plan in place.

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Need help? Contact us using the button below to discuss how your wealth strategy can support both your financial goals and your life aspirations.

FAQs

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1. What are the main financial concerns for retirees?

‍The major issues facing retirees include longevity (how long your capital will last), inflation (maintaining spending power), and income sources such as superannuation, non-super assets, and Centrelink benefits.

2. How can retirees protect against inflation?

‍To keep pace with inflation, retirees should maintain some exposure to growth assets like shares and property. A large allocation to cash can erode capital over time.

3. What strategies help maximise retirement income and capital?

‍Strategies include holding at least three years of income in cash, diversifying defensive and growth assets, using franking credits in super, and regularly rebalancing your portfolio.

4. Should retirees consider borrowing to invest?

‍Borrowing to invest carries risks and is generally not recommended for those already in retirement. Seek advice from a financial adviser before considering this strategy.

5. Why is estate planning important in retirement?

‍Estate planning ensures wealth is distributed effectively to beneficiaries. It includes having an up-to-date Will, Powers of Attorney, and superannuation nominations, as well as business succession planning if applicable.

Key Takeaways

• Shares represent part ownership in a company, giving investors exposure to capital growth and dividend income.
• Shares are bought and sold on Australian exchanges like the ASX and Cboe through a broker or adviser.
• Investors can access shares via the secondary market or through IPOs, where new shares are issued by companies.
• Share performance can be measured using market indices and dividend yield, not just daily price movements
• While shares offer long-term growth and tax benefits, they also carry risk, making diversification essential.

What Are Shares?

Shares represent your part ownership (or share) in a business.

Companies can raise money to finance their business by ‘going public’. Going public means being listed on a stock exchange and issuing shares to investors.

By paying for the shares, each investor buys part ownership of the company’s business and becomes a shareholder in the company.

The money that a company raises in this way is called equity capital. Unlike debt capital which is borrowed money, equity capital does not need to be repaid as it represents continuous ownership of the company.

In return for investing in the company, shareholders can receive dividends and other benefits. A dividend is the distribution of a company’s net profit to shareholders.

Shares that have been issued to investors by a listed company can be sold to other investors on the sharemarket. You make a profit when you sell your shares for more than you paid for them.

Buying and Selling Shares in Australia

Your adviser can buy and sell existing shares on your instruction on any business day on one of the recognised Australian securities exchanges (ASX or Cboe).

Orders to buy and sell shares are entered into a computerised trading system by your broking firm (e.g. Morgans). Buy and sell orders are matched by price in the order they were entered into the system.

That way, every order is processed by price and on a first in, first served basis. Larger orders do not have any priority. A trade occurs whenever a buy order is matched with a sell order.

Trades are settled on the second business day after the trade takes place. This means ownership of the shares and related payments between the buyer’s broker and the seller’s broker are transferred on that day.

All Australian listed shares are registered electronically on either the Clearing House Electronic Sub-register System (CHESS) operated by a subsidiary of the ASX Group, on behalf of listed companies, or on the companies’ own sub-registers.

Buying New Shares: IPOs and Floats

Alternatively, you can buy new shares that are issued by companies from time to time by applying to participate in a float or initial public offering (IPO). Shares you buy through an IPO are registered as Issuer Sponsored Holdings. The price of shares issued in a float is generally specified in the prospectus.

If you wish to buy shares in the float, you should first review the prospectus then fill out the attached application form specifying the number of shares you wish to buy and lodge it with your adviser before the application deadline.

Once new shares are issued and listed on a recognised Australian securities exchange, they may trade at a market price substantially different from the issue price (either higher or lower). This is due to supply and demand for the shares in the company.

How Share Performance Is Measured

Sharemarket indices represent the overall performance of companies listed on a stock exchange. Investors can use these indices to track how an investment is performing by watching its share price.

The key sharemarket indices in Australia are the Standard & Poor’s (S&P)/Australian Securities Exchange (ASX) indices.

These include the All Ordinaries Index (All Ords), which is a market capitalisation index comprising the 500 largest companies listed on the Australian Stock Exchange, and segments of the ASX, called:

• S&P/ASX20 – Top 20 stocks
• S&P/ASX50 – Top 50 stocks
• S&P/ASX100 – Top 100 stocks
• S&P/ASX200 – Top 200 stocks
• S&P/ASX300 – Top 300 stocks

Another way to track your shares’ performance is to calculate the dividend yield from your portfolio on an annual or more regular basis. This can be a more reliable measure because share prices rise and fall on a daily basis, whereas dividend income is usually much steadier and often grows over time.

For definitions of common investment terms, visit the Morgans sharemarket glossary.

Benefits and Risks of Investing in Shares

Capital Growth

As a long-term investment, shares have the potential to provide better returns after tax than any other major investment. However, past performance is no guarantee of future returns.

Although share values have risen over the long-term, this has been punctuated with periods of short-term volatility, where prices can go up or down very quickly. For this reason, it is usually important to adopt a medium to long-term investment view of five years or more.

Dividend Income

Another benefit of being a shareholder is dividend income, although dividend yields vary greatly from company to company.

Companies trying to grow their business might provide a low dividend yield (perhaps 2–4%) while other, more established companies might provide a higher dividend yield (potentially between 6–8%).

Tax Benefits

Shareholders have to pay Capital Gains Tax on any net capital gains made by selling shares; however, their income tax liability can be offset through dividends they receive with franking credits.

Franking credits pass on the value of any tax that a company has already paid on its profits. A company can pay a fully franked dividend if it has paid full corporate tax on the profits distributed as dividends. A partly franked dividend would be paid if the balance of the franking account was not sufficient to pay a fully franked dividend. An unfranked dividend is declared where there is nothing in the franking account.

A company will advise shareholders of the status of the dividend at the time of payment. If you receive franked dividends, you must declare both the cash amount and any franking credits as assessable income in your tax return. Then you can apply the franking credit amount to reduce your income tax liability.

Risks of Share Investing

Share prices of any company, even a blue chip, are always subject to change. Some investors fall into the trap of putting all their money into one asset class – usually at its peak, and then watch as another asset class takes off without them. It is important to have a number of different shares in your portfolio to reduce the risk inherent in share investing.

Ready to Start Investing With Confidence?

Whether you’re buying your first shares or refining an existing portfolio, a Morgans adviser can help you make informed decisions backed by expert research and personalised advice.

Get clear guidance on share selection, risk management and long-term strategy, and invest with confidence at every stage of your journey.

Speak with a Morgans adviser today.

FAQs

1. What are shares?

Shares represent part ownership in a company. When you buy shares, you become a shareholder and own a portion of the business. Companies issue shares to raise equity capital, which does not need to be repaid like debt. Shareholders may receive dividends and can sell their shares on the sharemarket.

2. How do you buy and sell shares in Australia?

You can buy and sell shares through a licensed adviser on recognized Australian securities exchanges such as the ASX or Cboe. Orders are entered into a computerized trading system and matched by price on a first-in, first-served basis. Trades settle two business days after execution, and ownership is recorded electronically via CHESS or the company’s sub-register.

3. What is an IPO or float?

An IPO (Initial Public Offering) or float is when a company issues new shares to the public for the first time. Investors apply by reviewing the prospectus, completing an application form, and lodging it before the deadline. Shares bought in an IPO are registered as Issuer Sponsored Holdings and may trade at different prices once listed due to supply and demand.

4. How can you track share performance?

Share performance can be tracked using sharemarket indices like the S&P/ASX indices (e.g., ASX200, ASX300) or by monitoring share prices. Another reliable measure is calculating dividend yield from your portfolio, as dividend income tends to be steadier than daily price movements.

5. What are the risks and benefits of investing in shares?

Benefits include potential capital growth, dividend income, and tax advantages through franking credits. Risks include price volatility and the possibility of losses, especially if you invest in a single asset class. A medium to long-term view (five years or more) and diversification are important to manage risk.

Key Takeaways

• Starting financial planning in your 20s builds long-term wealth and security.
• Budgeting and managing debt early prevents financial stress and high-interest payments.
• Regular savings plans and super contributions take advantage of compounding for future growth.
• Insurance and wealth protection are crucial even for young adults.
• Professional advice helps tailor strategies to your individual goals and circumstances.

Why Financial Planning Matters in Your 20s

In your twenties, thinking about long-term financial issues like superannuation, retirement, or wealth protection can be challenging. However, establishing good habits now ensures financial security for milestones such as buying a car, travelling, or saving for a house deposit.

Budgets: How to Manage Your Money

Creating a budget is the best way to manage day-to-day living costs and ensure funds are available for regular expenses, such as rent, utilities, groceries, fuel, and insurance.

Step 1: Record your net income and list regular outgoing expenses to calculate your net cashflow. This identifies any surplus you can dedicate to savings.

Step 2: Determine how much you can save regularly (weekly, fortnightly, or monthly) and automate transfers to a chosen investment strategy.

Cost-saving tips:

• Consolidate debt
• Make your own meals instead of buying lunch
• Compare insurance and credit card rates for better deals

For further budgeting guidance, see Morgans financial planning services.

Regular Savings Plans

These plans allow you to invest surplus income while keeping access to funds if needed. Typically, you invest an initial lump sum followed by regular installments, usually monthly. Minimum contributions often start at $100.

Debt Management

Managing credit cards and other debts is crucial:

• Choose a credit card limit appropriate for your income.
• Pay off balances each month to avoid high interest or penalties.
• Avoid unnecessary credit limit increases.
• Never use credit cards for investments; consider investment loans instead.

Superannuation: Planning for Retirement

Superannuation is key to securing a comfortable retirement. Contributions grow over your working life and can be increased over time.

Contribution options:

• Superannuation Guarantee Contributions: Employers contribute 11% of your salary. You may be able to direct these contributions to your chosen super fund.
• Government Co-contributions: Low or middle-income earners making eligible personal contributions may receive matching contributions up to $1,000.

For more information, see Morgans superannuation guidance.

Wealth Protection

Even without dependants or a mortgage, young adults have financial obligations including loans, rent, or HECS/HELP. Personal insurance safeguards your financial position.

Income Protection: Replaces income if illness or injury prevents you from working, helping cover daily expenses.

Life Cover: Provides a lump sum to clear debts for beneficiaries if your assets are insufficient.

Seek professional advice when choosing coverage, considering levels, ownership structures, and funding arrangements.

Get Professional Support

Morgans advisers can help you design a wealth strategy that aligns with your financial goals and life aspirations. Early planning ensures you build a strong foundation for financial security and flexibility.

Contact a Morgans adviser today.

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FAQs

Why is financial planning important in your twenties?

‍Good planning and financial discipline in your twenties helps you achieve goals like buying a car, travelling, or saving for a house deposit, and sets the foundation for long-term financial security.

How do I create an effective budget?

‍Start by listing your net income and regular expenses to calculate your cashflow. Then determine how much you can save regularly and set up automatic transfers into a savings or investment account.

What is a regular savings plan and how does it work?

‍A regular savings plan allows you to invest surplus income through an initial lump sum and ongoing monthly contributions, usually starting at $100, managed by a fund manager.

How can I manage credit card debt effectively?

‍Choose a card with a low interest rate, pay more than the minimum monthly repayment, avoid increasing your credit limit, and never use credit cards for investment purposes.

Why should I start thinking about superannuation in my twenties?

‍Superannuation builds retirement savings through employer contributions and optional personal contributions. Starting early maximises growth and reduces reliance on government pensions later in life.

Our best ideas are those that we think offer the highest risk-adjusted returns over a 12-month timeframe supported by a higher-than-average level of confidence. They are our most preferred sector exposures.

Additions: This month we add Superloop (ASX:SLC).

Removals: This month we remove Mineral Resources (ASX:MIN).

Large cap best ideas

Treasury Wine Estates (ASX:TWE)

It may take some time for the market to digest TWE’s acquisition of Paso Robles luxury wine business, DAOU Vineyards (DAOU) for US$900m (A$1.4bn) given it required a large capital raising. The acquisition is in line with TWE’s premiumisation and growth strategy and will strengthen a key gap in Treasury Americas (TA) portfolio. Importantly, DAOU has generated solid earnings growth and is a high margin business. It consequently allowed TWE to upgrade its margins targets. While not without risk given the size of this transaction, if TWE delivers on its investment case, there is material upside to our valuation. The key near-term share price catalyst is if China removes the tariffs on Australian wine imports.

CSL Limited (ASX:CSL)

While shares have struggled of late, we continue to view CSL as a key portfolio holding and sector pick, offering double-digit recovery in earnings growth as plasma collections increase, new products get approved and influenza vaccine uptake increases around ongoing concerns about respiratory viruses, with shares trading at 25x, a substantial discount (20%) to its long-term average.

ResMed Inc (ASX:RMD)

While weight loss drugs have grabbed headlines and investor attention, we see these products having little impact on the large, underserved sleep disorder breathing market, and do not view them as category killers. Although quarters are likely to remain volatile, nothing changes our view that the company remains well placed and uniquely positioned as it builds a patient-centric, connected-care digital platform that addresses the main pinch points across the healthcare value chain.

QBE Insurance Group (ASX:QBE)

With strong rate increases still flowing through QBE's insurance book, and further cost-out benefits to come, we expect QBE's earnings profile to improve strongly over the next few years. The stock also has a robust balance sheet and remains relatively inexpensive overall trading on 8x FY24F PE.

South32 (ASX:S32)

S32 has transformed its portfolio by divesting South African thermal coal and acquiring an interest in Chile copper, substantially boosting group earnings quality, as well as S32's risk and ESG profile. Unlike its peers amongst ASX-listed large-cap miners, S32 is not exposed to iron ore. Instead offering a highly diversified portfolio of base metals and metallurgical coal (with most of these metals enjoying solid price strength). We see attractive long-term value potential in S32 from de-risking of its growth portfolio, the potential for further portfolio changes, and an earnings-linked dividend policy.

Pilbara Minerals (ASX:PLS)

We view PLS as a fundamentally strong and globally significant hard-rock lithium miner. The company has successfully executed on ramping up the expansion of Pilgangoora, while progressing plans to expand output (P680 and P1000). Supported by a strong balance sheet, with net cash at ~A$2.1bn at the end of December, PLS’ expansion plans remain uniquely undeterred by the significant weakness in lithium prices. For PLS, the best form of defence against lithium prices is to stay on the attack, with its medium-term plans to continue expanding its production aimed primarily at building greater economies of scale and a more defensive margin.

Woodside Energy (ASX:WDS)

A tier 1 upstream oil and gas operator with high-quality earnings that we see as likely to continue pursuing an opportunistic acquisition strategy. WDS’s share price has been under pressure in recent months from a combination of oil price volatility and approval issues at Scarborough, its key offshore growth project. With both of those factors now having moderated, with the pullback in oil prices moderating and work at Scarborough back underway, we see now as a good time to add to positions. Increasing our conviction in our call is the progress WDS is making through the current capex phase, while maintaining a healthy balance sheet and healthy dividend profile. WDS still has to address long-term issues in its fundamentals (such as declining production from key projects NWS/Pluto), but will still generate substantial high-quality earnings for years to come.

Morgans clients can download our full list of Best Ideas, including our mid-cap and small-cap key stock picks.

Investing is a personal issue and individual needs vary greatly. Any investment decision should be based on rational and logical reasoning as to what you need and hope to achieve.

Determine your investment objectives

The first thing you should do before making an investment is to determine your investment objectives. To determine this, ask yourself the following questions:

• How much money do I have available to invest?
• What do I want to achieve from the investment?
• Over what period?
• What risks am I prepared to take to achieve this?
• What rate of return do I require from the investment?
• What other investments do I have that should be considered as part of my overall strategy?

Risk and returns

The balance between investment risk and investment return is particularly important. Your risk/return profile needs to be determined, in conjunction with your adviser, to determine an appropriate investment strategy that meets your objectives.

Risk

Risk is the chance that the return from an investment will be significantly different from what you expected. There is an element of risk in every type of investment and it can show up in various ways:

• There is a risk that you may not get the earnings (or return) you expected from your investment
• There is a risk that you may lose some or all of your capital
• There is a risk that changes in the value of money, due to inflation, mean that you are not compensated adequately for your investment
• It is important to determine the degree of risk which is acceptable to you and have your adviser match it with appropriate types of investments.

Return

Some investments promise a fixed rate of return (such as fixed interest investments) while others have a variable rate of return (shares). Return can also come in the form of income (via interest or dividends) or capital gain (realised when an investment is sold for a profit), both of which have different tax implications.

Your needs or preference for types of returns will determine the type of investments selected.

Finding a balance

Risk and return are directly related. Higher risk investments often produce higher returns (or higher losses). Lower risk investments may mean lower returns. It is often quite difficult, if not impossible, to produce high returns with low risk.

The balance between risk and return will form the basis of your investment strategy.

Investment strategy

Diversification is a fundamental principle of wise investment and is a key element of your ability to reduce risk while achieving suitable returns.

Investors have a better chance of achieving consistent performance over the medium to long term by spreading their investments across a range of asset classes including cash, fixed interest, shares and property, and by having exposure to local and international markets.

The exposure levels to each of these asset classes will be determined by your investment objectives and risk/return profile. Your needs may change over time so it will be important to regularly monitor and update your investment strategy to account for these changes.

Your investment choices

There are four main classes of assets in which you can invest:

Cash

Cash covers deposits with banks, building societies and credit unions, and overnight market investments. Cash has the advantage of being relatively secure and easily accessible. Inflation has an adverse impact on its value.

Income investments

In a basic sense, income investments involve lending money to a financial institution or company. In return, you receive regular interest payments for the term of the loan. Returns are usually higher than cash and fairly predictable. Most fixed interest products are reasonably secure but vary depending on the issuer and terms. In addition to the traditional range of securities, there is a growing pool of new and innovative investments to consider.

Shares

Shares represent your part ownership (or share) in a business which can be traded on the Australian Stock Exchange. Capital and income usually rises with inflation. Liquidity (ability to trade the shares) is usually good and gains are historically superior over the longer term. Volatility can affect returns over shorter time frames.

Property

Property investments are in real estate whether it be residential, commercial, retail or industrial properties. Property can be held directly or indirectly through a listed or unlisted property trust. Capital and income usually rises with inflation. Liquidity can be an issue and direct property often requires more maintenance than other types of investments.

Do you want to invest directly or indirectly?

Investing directly has the advantage of control, but the disadvantage of requiring hands-on management. Buying units in an investment trust (often called a managed fund) is an indirect way of making investments in shares, property, fixed interest or cash.

Investing indirectly enables you to achieve diversification more easily by pooling your funds with other investors and using the expertise of a professional manager to make investment decisions. The disadvantages are that fees may be higher than investing directly as they are ongoing rather than one off. The returns are also largely dependant on the skills of the fund’s management team which can be difficult to measure, except on an historical basis.

Investors can also choose to invest directly in some areas while using managed funds in more specialist investments such as overseas shares.

Do you want to be geared or ungeared?

If investment monies are borrowed, in whole or part, the investment is geared. By borrowing funds to invest, you considerably increase the risk associated with your investment but also increase your profit potential when returns are positive.

Gearing can be a very successful investment strategy but needs to be carefully considered as to whether it is appropriate for your needs.

Managing your investments

A somewhat cumbersome but essential part of investing is the collection of all of your investment documentation, such as share trades, dividends or interest payments.

Many investors are time poor or have no wish to administer their investment portfolio and deal with all the paperwork.

Morgans has created a service that takes the hassle out of investing by collecting and recording all of your investment documentation. This service, called Wealth+, also provides you with regular reports to help you monitor your portfolio valuation and forecast income.

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Need help? Contact us using the button below to discuss how your wealth strategy can support both your financial goals and your life aspirations.

FAQs

1. What should I consider before making an investment?

Before making an investment, you should determine your investment objectives by asking yourself:

• How much money do I have available to invest?
• What do I want to achieve from the investment?
• Over what period?
• What risks am I prepared to take to achieve this?
• What rate of return do I require from the investment?
• What other investments do I have that should be considered as part of my overall strategy?

2. What is the relationship between risk and return in investing?

Risk and return are directly related. Higher risk investments often produce higher returns (or higher losses), while lower risk investments may mean lower returns. It is often quite difficult, if not impossible, to produce high returns with low risk.

3. What are the main types of investments I can choose from?

There are four main classes of assets in which you can invest:

• Cash: Secure and easily accessible, but inflation impacts its value.
• Income investments: Lending money for regular interest payments; usually predictable returns.
• Shares: Ownership in a business traded on the ASX; historically superior gains over the long term.
• Property: Real estate investments; can be direct or through property trusts, but liquidity can be an issue.

4. What is the difference between investing directly and indirectly?

• Direct investing gives you control but requires hands-on management.
• Indirect investing (via managed funds) enables easier diversification and uses professional managers, but fees may be higher and returns depend on the fund manager’s skill.

5. What is gearing and how does it affect investment risk?

If investment monies are borrowed, the investment is geared. Borrowing funds to invest considerably increases the risk associated with your investment but also increases profit potential when returns are positive. Gearing can be successful but needs careful consideration.

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