Investors with cash on their hands face a huge dilemma. Should they leave their money in the bank at a low rate of interest, or take a risk and go back into the investment markets that have left many with a much reduced level of wealth? Investor confidence has been left shattered by the Global Financial Crisis but will return. As we move into 2011, we should reflect on some of the lessons learned in the last few years, such as:
- The importance of investment liquidity; that is, the ease and speed with which investments can be converted to cash.
- The importance of diversification; that is, not having all your investments in one asset class or one geographic location
- Return doesn’t necessarily reflect the level of risk
- Markets don’t stay down forever.
Investors have a choice of four asset classes; cash, bonds, property and shares. They can also choose to invest in New Zealand or offshore. Cash is safe and liquid, but unlikely to produce a good return in the short term. As interest rates rise, bond values will fall and already investors are moving away from this asset class. There are bargains to be had in property but with low projected growth, this asset class is for those with a long term investment horizon. For shares, the outlook is much more promising. In particular, emerging markets such as China, India and Brazil are expected to outperform developed markets over the medium term. There are also opportunities in what are referred to as ‘alternative’ investments, for example investments based on commodities such as mineral resources, precious metals, water and agricultural products.
Investing in 2011 will be no different than investing in any other year. There will be good opportunities for those who use sound investment principles.