The four key questions in determining how to invest are:-

1. Who should own the investment?
2. In which asset class (or classes) should you invest?
3. Should your capital be invested locally or internationally?
4. Should you invest directly in the asset or indirectly through fund managers?

WHO SHOULD OWN THE INVESTMENT?

The first decision that needs to be made is which person or entity the money should be invested in (i.e. Who should the investor be?). Investments can be made through various parties. For example, should the money be invested in the name of the individual (husband, wife or child), joint names, a superannuation fund, a family trust, a partnership or a company?

Each party will be subject to different taxation treatment on income and capital gains. Some parties will be subject to specific limitations such as in the case of superannuation funds. Other issues that need to be considered in answering this question may include the investors objectives, attitude to risk, time horizon, income requirements, liquidity needs and asset protection considerations but to name a few.

IN WHICH ASSET CLASS (OR CLASSES) SHOULD YOU INVEST?

There are basically four classes of assets to choose from, regardless of the tax entity selected or whether direct/managed and/or listed/unlisted investments are used. These four asset classes are:

Shares

Property

Fixed Interest

Cash

Each asset class has variations within it and there are hybrid investments that may comprise a combination of assets (eg. convertible notes which are part share and part fixed interest).

The decision as to which asset to invest in will be determined by such factors as:

• the investor's attitude to various types of investment risk
• the amount of money available to invest
• the period of investment
• the motive for investing eg. growth of assets or income producing ability
• the liquidity of the investment
• the investment return
• the taxation treatment of the income from the asset (eg. dividends from shares have different tax consequences than rent from property)
• the existing asset allocation of the person/entity

Many investors spread their capital across several asset classes. This process is commonly referred to as asset allocation and is used to determine the percentage of your total capital to be applied to each asset class. Asset allocation ensures that the assets in your portfolio are well diversified and may help to minimise investment risk and enhance returns.

SHOULD YOUR CAPITAL BE INVESTED LOCALLY OR INTERNATIONALLY?

Each of the above asset classes can be invested in, either locally or internationally. A decision as to how much to invest locally and how much overseas needs to be made. The advantage of investing internationally is the diversification it offers in terms of countries and individual investments. This is of particular relevance for shares. The Australian stockmarket represents less than 2% of the world stock market and hence some profitable industries are not present in Australia.

The drawbacks of investing internationally can include foreign currency risk (although this can be a positive factor depending on the currency movements) and the difficulty in having access to correct and timely information for making investment decisions.

DIRECT VERSUS MANAGED INVESTMENTS?

A decision as to whether to invest directly or via the use of fund managers also needs to be made prior to making any investment decision.

DIRECT INVESTMENTS

Direct investment refers to the situation where an individual selects the particular asset in which to invest whether it be a particular share (such as Commonwealth Bank), rental property or fixed interest investment.

The advantages of investing directly include:

• The greater level of input available to individual investors in selecting specific investments;
• Increased control can be exercised in accordance with the year to year tax planning requirements of individual clients;
• Direct investment is likely to be less expensive than managed investments as there are no management fees.

The disadvantages can include:

• Diversification between asset types may be difficult with limited money to invest;
• The individual requires a certain amount of time, interest, knowledge and confidence to be successful in the long-term;
• A greater involvement may be required on the behalf of the investor to assist in the ongoing administration of the investment.

MANAGED INVESTMENTS

A managed investment pools the money of many investors to form an investment fund. Investment managers then invest the money on behalf of the client. Managed investments can be either listed or unlisted.

The advantages of managed products include:

• It is easier to diversify amongst different asset classes (such as shares, property and cash) and different geographical regions and industries. This is particularly so with smaller amounts of money to invest.
• A fund manager may have access to markets that may not be available or be efficient for the individual to invest in directly.
• Investment specialists make investment decisions for the investor and hence it is a more time efficient way to invest. This approach is often suited to investors who do not have the time, confidence or interest to make these decisions.
• Managed investments reduce the administrative burden of investing as a result of the fund manager handling the paperwork, providing regular information on the funds performance and providing the relevant tax statements.

The disadvantages of managed products include:

• Managed products will generally cost more than investing directly because of the annual management charges.
• The lack of control over the individual assets selected is also perceived as a negative feature by many investors.
• The uncertainty in tax planning due to the receipt of taxable realised capital gains varying from year to year.

HOW CAN HOLST ASSIST YOU WITH YOUR INVESTMENT DECISIONS?

Individuals need to ensure that they receive independent advice that considers the four decisions outlined above before committing to any investment.

Your HOLST adviser can assist in determining:

• The appropriate tax entity for investments (i.e. who should the investor be?).
• Which asset class or combination of asset classes should be selected.
• Whether international assets should form part of your investment portfolio.
• Whether the investment should be made directly or via managed products.

Note that once these decisions are made and the funds invested, your HOLST adviser can assist in reviewing your investment portfolio to ensure it continues to meet your financial situation, investment objectives and particular needs.