Choosing your target asset allocation
The determinants of your asset allocation choice
In our previous article, “Understanding asset allocation”, we focused on the questions “What is asset allocation?” and “Why is it important?”. In this article, we provide an overview of what is most important when choosing your target asset allocation or investment risk exposure.
At the highest level, we measure risk exposure by how your investment wealth is divided between defensive (low risk) and growth (higher risk) investment assets. In “The asset allocation decision” we explained that your mix between defensive and growth assets should be determined after a careful weighing up of the following sometimes competing considerations:
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Understanding asset allocation
Asset allocation: a measure of your investment risk
Our objective is to help clients become financially well organised and make smart financial choices so they have the best chance of enjoying the financial future they want. A key to achieving this objective is agreeing an appropriate investment risk exposure with each client and carefully managing that exposure over time. For us, this risk exposure is most appropriately measured by the client’s asset allocation.
This is the first in a series of four articles that explain our approach to asset allocation. Most people think they have a pretty good idea of what asset allocation is all about. Our experience suggests they don’t. While we start off pretty basically, we hope that by the final article you will agree that by viewing asset allocation in the lifelong context we advocate some conventional financial planning views are challenged and some smarter ways of thinking about personal finance issues emerge.
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Inheriting substantial wealth
Substantial inherited wealth can be a mixed blessing
Managing wealth can be a challenge, particularly when the wealth is inherited and substantial. The excitement of inheriting life-changing wealth is often short lived. The reality can be a life that is anything but that of your dreams.
To most, inheriting a large amount may seem like a problem worth having. Yet it often presents some unexpected dilemmas for those inheriting the wealth (and for those planning to leave significant wealth to their children). This is particularly the case for wealth recipients who have yet to independently develop their own “money maturity”.
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Concentrated investments are bad bets
Putting all your eggs in one basket may make you wealthy …
Most people are attracted to the idea of becoming fabulously wealthy by being a substantial and early investor in the next Microsoft, Google or, the latest technology darling, Facebook. But they generally understand that the chances of selecting such “winners” are slim.
However, it is not widely understood that although a large holding in a single investment has the potential to make you much richer, it is far more likely that it will result in you being worse off than if you had adopted a more diversified investment strategy.
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Living with investment market uncertainty
Uncertainty is the only certainty there is
Whether we like it or not, the real world rarely behaves in ways we expect. Our progress towards a goal is unlikely to occur in a nice linear path. Inevitably, we encounter detours and short cuts along the way, and we may experience feelings of devastation and euphoria depending on our progress relative to our expectations.
Investing is an example of the ongoing dilemma faced when reconciling our outcomes with our expectations. Given the inevitable need to invest our savings, how do we cope with the volatility and unpredictability of markets? Click Here To Read More
Personal finance basics for young adults
Personal finance literacy is acquired haphazardly
The unfortunate reality is that personal finance is not adequately taught in schools. Young people usually learn personal finance behaviours either from their parents or by doing. Not surprisingly, the lessons learned are of variable quality and, in many cases, perpetuate practices that are not conducive to developing a healthy long term relationship with money.
Clients often ask us to spend some time with their adult children, who have entered or are just about to enter the work force, to provide them with some personal finance basics. In this article, we share twelve of the ideas we discuss with our clients’ children. If they are understood, accepted and practised, we are confident that they will see money relegated to its appropriate place in the children’s life i.e. as a valuable servant rather than a domineering master.
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How much do I need to be able to retire?
How much is enough?
You’re at or nearing retirement and you’re obviously keen to enter this phase of your life feeling comfortable about the future. There’s one question you want answered with confidence – Have I got enough to live happily ever after?
Unfortunately, there’s not a straight forward answer to this relatively simple question. There are many rules of thumb used – these generally range between 12 to 25 times your expected annual retirement spending. Yet, the amount you need is dependent upon your specific retirement goals.
What are your retirement goals?
Primarily, most people’s retirement goal is to ensure that they don’t run out of money. However, you may also want to leave some wealth to your children or other beneficiaries of importance. You may find that you have to curtail your own spending to achieve this. The last thing you want to find out is that you’ve under spent and left too much to your estate.
Your ultimate aim is to reach your target wealth at just the right time. Unfortunately, there are a number of uncertainties which make achieving this aim a far more difficult task than it appears.
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Building your exposure to shares and property
Two approaches to building investment wealth …
We see two common approaches to building investment wealth and, particularly, exposure to growth assets (i.e. shares and property) among couples in their thirties and early forties. These people have generally borrowed to purchase a residence, with all or most available cash being consumed by the mortgage and meeting the expenses of raising what may be a growing family.
The first approach we will call “conservative”, even though we don’t really think it is. It involves directing all savings, except perhaps superannuation contributions, to repayment of the mortgage. There is no deliberate increase in growth asset exposure until the mortgage has been cleared and surplus cash is available to buy shares or property, either directly or via managed funds. It is viewed as imprudent to invest in risky growth assets before all debt has been repaid.
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Executive Shares and Options: Beware the “Liquidity Trap”
Deferred tax benefit may bring tax surprises
Many executives receive shares and options from their employer as part of the remuneration package. Mostly this form of bonus is received without the need for any immediate cash or tax outlay. And because the shares and options are restricted from sale until some future date they often get filed away in the bottom drawer for some future review.
While this may be a fairly natural response to something that has no immediate impact, failure to manage these “gifts” can result in some nasty surprises.
These bonuses are not “free”. They come encumbered with future taxing points and unless you keep good records and have a clear strategy for managing them you may end up in an unexpected “liquidity trap”. The two case studies discussed below provide illustrations.
“Ace stock picker” claim warrants further investigation
Eight years of market outperformance seen as indicator of skill …
An article in “The Australian” of 20 October 2010, titled “Ace stock picker John Sevior the key to bid for Perpetual”, suggests that the proposal by private equity group KKR to purchase fund manager, Perpetual Limited, depends on retaining the services of veteran stock picker, John Sevior.
To illustrate Sevior’s importance to the Perpetual business, the article points out that since he was appointed head of Australian equities in September 2002, Perpetual’s flagship Wholesale Australian Share Fund had returned 12% a year (net of fees). This compares with the annual return for the well accepted market benchmark, the S&P/ASX 200 Accumulation Index, of 10.22% for the same period.
The article goes on to say:
“Industry observers said yesterday a 1.78 per cent outperformance a year for eight years was a creditable effort. This was especially so because the market was driven by growth stocks (the commodities boom) for much of that time, while Perpetual is a so-called value manager specialising in finding undervalued companies”.
So the conclusion appears to be that Sevior (and his team) must be highly skilled and adding significant value. But is this a valid conclusion?
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