If you’re risk averse, investing can feel very overwhelming – but if you pick the right investments, it doesn’t have to stress you out.
One of the highlights of my day is hosting The Call at midday AEDT on www.ausbiz.com.au. Viewers send in shares they want an opinion on and I put those suggestions to an expert panel for their views. Ten stocks analysed over the hour – it’s a lot of fun.
Long-term steady gains for the risk-averse
But as well as just the stock suggestions, I also love the questions which come with them from our viewers. This week Jayne asked about Macquarie Group, but it’s what she asked which was so good because I reckon it reflects the important issues facing so many investors:
I’m a fairly new investor and avid watcher (and listener of the podcast) of The Call to pick up tips for my watch list. Given the current slide in the value of stocks, I want to streamline my top 10. Based on all the experts’ advice on this wonderful show, I’m looking for the best-run companies on the ASX for long-term steady gains (in both capital growth and decent dividends) as I’m risk averse. Slow and steady wins the retirement race for my situation.
Will MQG Macquarie Group fit in my shopping list of the best 10? What are their risks? What are the key things to look out for that could indicate that this company (or any company) will take longer to recover or will end up keeping me awake at night? Other than the macros at play and making a profit every year, are there other indicators in the management style or ownership or phrases on a annual/quarterly report to watch out for? Are there any other recommendations on how to find these long term market darlings that just keep doing what they are supposed to be doing and can be purchased at a decent price during a pullback?
A ‘forever stock’ BUT…
Both Carl and Henry agreed Macquarie Group is one of the top 10 stocks on the Australian sharemarket and what Henry called a “forever” stock… a company which you put in your portfolio and just forget about. It’s a proven performer over many years, with a highly-regarded management team.
Jayne’s “risk averse” filter means it may not be right for her in Carl and Henry’s view. Remember, Macquarie is a bank. Different to the big four banks in that it is more an investment bank, which is more aggressive in its corporate deal-making. That can come with additional risk alongside the traditional banking risks, when economies slow or interest rates go up. Macquarie is great at what it does, but it still carries that banking risk.
When I asked them for another option which would suit Jayne’s criteria, Henry suggest global medtech CSL (particularly after its recent pullback), while Carl thought property giant Goodman Group could fit the bill.
Where to put your money if you’re risk averse
Defensive investments – like cash and fixed income assets – are the lowest-risk investments. As with any low-risk option, your returns are limited. But a defensive strategy can be a solid way to meet short financial goals or diversify your portfolio.
Moving up the risk scale, blue chip shares and property can offer stable returns for the risk averse, but they are more volatile than defensive investments.
For the lowest risk option, you could choose a bank account to park your money in (bearing in mind that savings account rates are abysmal right now). Higher-interest savings accounts and term deposits may be slightly more attractive.
According to the Vanguard Index Report, cash investments averaged 2.2 gross per cent returns per annum over the past 10 years. Not great, but not nothing either.
Fixed income investments – like government or corporate bonds, debentures and capital notes – offer similar, though slightly higher, returns to cash. The average return for cash investments over the past 10 years has been 3 per cent; bonds have returned 3-4 per cent.
When purchasing government bonds, you are basically lending money to the government which is then paid back with interest. You receive this interest in regular payments throughout the length of the bond.
The Vanguard Index Report says that Australian bonds averaged 5.02 per cent in gross returns per annum over 10 years. While they are considered a ‘boring’ investment, that’s not such a bad thing. Fixed income assets are an excellent way to diversify your investment portfolio to offset any volatility in both the share and property markets.
Shares are vulnerable to sudden fluctuations in price that can result in big gains or losses in the value of your investment. However, Vanguard reports that Australian shares averaged 9.31 per cent in gross returns per annum over ten years to June 2021, so on average over time the gains certainly outweigh the losses.
‘Blue chip shares’ are shares in companies who are leaders in their industry. The ‘blue chip’ moniker comes from poker, where the blue chip is the most valuable.
Blue chip companies have products or services that generally dominate their respective markets. In Australia, companies like the Big 4 banks, BHP, Woolworths, Telstra, Rio Tinto and Wesfarmers (who own leading retail outlets like Bunnings, Kmart, Target and Officeworks) are considered blue chip companies. In the US, FAANG stocks are considered blue chips.
Blue chip shares are quite a stable investment comparative to other shares. They are highly reputable and each have long records of paying rising dividends to their shareholders. Anyone who is risk averse shouldn’t underestimate the power of dividends for growing wealth.
Investing in property can be expensive to get into, but it’s a favoured asset class due to its long-term stable returns.
According to the Vanguard Index Report, Australian listed property averaged 12.91 per cent in gross returns per annum over ten years to June 2021. While property can have it’s ups and downs, generally it’s a stable investment if you pick the right area. In 2020, the property market stalled due to the pandemic, however last year it rebounded impressively, returning a massive 33.2 per cent.
Keep in mind that when it comes to property there are extra costs involved in managing your investment. The gross returns offered by the property market can be misleading as there can be significant costs involved in upkeep and renting out your asset.