The Australian and the international shares are both shares from public companies on the stock market. The only difference between the two is the probability of risk and returns. The Australian shares have the biggest risk but it also has the biggest potential returns. The international shares have a very low level of risk because of their diversity. The only downside with it is the lower projected returns.
The property market on the other hand has a return rate between Australian shares and international shares.
The risk however is even bigger than the Australian shares. The main advantage of this asset type is the ability to combat inflation. The benefits of using the property for those that are actually living in Australia is also steady. The intrinsic value of the property can’t be measured by financial ratios but the benefits to the owners are real just the same, (Graham, 2006).
The property asset might have substantial higher risks but they are the best protection against inflation.
The value of properties simply goes up in time. Despite the arecent real estate meltdown, the real estate market is still poised to appreciate in a matter of time. The benefits of being able to use a property would not be diminished in anyway even if the market value is lowered. The market value can change anytime but the benefits of having a property remains the same.
The bonds are slightly lower in returns to properties but with a risk level three times lower than that of the property.
The advantage of this asset class is the predictable and steady returns. All the interest rates are printed in the bond certificates that you buy. The promised return will be delivered with very minimal possibility of having a default.
The only disadvantage here is the fact that bonds are transacted with money itself. It has no protection against inflation (Revsine, 2004). As an investor, you have to calculate the rate of inflation and factor it with the return that you find acceptable to evaluate the profitability of the bond investment.
The cash asset itself has the lowest interest rates. The main advantage of this asset class is the liquidity of its nature. The investor can use it immediately anytime they have a need for it. There are no problems associated with accessing it like in the case of having real estate properties. The main drawback to this asset class aside from its low interest rates is the lack of protection against inflation. The cash asset is good only for immediate usage but does not offer other types of value appreciation like real estate properties.
Q2. Your own superannuation (super) fund has considerably increased the
management fees that they charge and you have decided to manage your
own super fund. From the portfolio options above, which would you
choose for yourself? Justify your choice.
The three portfolio options are all good but they do not cater to the needs of the same individual. I will judge the best fund according to my age and needs. The first portfolio composed of asset classes ABC has one of the highest returns but also with the highest risks. It is the best option for young college graduate because at their age, they can afford to face more risks. People at this age can still sustain potential damage to their portfolios because they have time to build up their retirement funds. The big risk would allow them to gain even more in case the market appreciates in value.
The second portfolio consisting of asset classes ADC is the best option for a middle aged couple. It has almost the same level of returns as the first portfolio but with a considerably lower risk level. It matches the needs of a middle aged couple and also accommodates lesser capability for risks (Graham, 2004). The last portfolio which consists mostly of cash would accommodate a senior citizen because they have less time to stay in this world and would need all the liquidity they can get. A smaller return on their portfolios would not matter much because they have lesser needs.
Benjamin Graham, (2004), “Securities Analysis”
New York, McGraw Hill
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