The Allure of Gold
Gold as a safe haven
The allure of Gold, as a viable long term investment option, has shot to new heights in the past five years. While this is perhaps understandable given its status as a safe haven, should it be a fundamental component of an investment portfolio?
There is a lot of misunderstanding about gold, its role in the financial system and use within an investment portfolio. We aim to address some of these misunderstandings.
A Brief History of Gold
Gold first became a transferable form of money around 560 B.C. when gold coins (stamped with a seal) were used by merchants to simplify trade. The coins were valued according to their inherent gold content. In 1066, Great Britain developed the British pound (symbolising a pound of sterling silver) and other units of currency based on their inherent metal value. During this period, gold (and silver) represented the main means of exchange (i.e. money).
Is a 100% defensive portfolio low risk?
The real risk is running out of money
In turbulent and generally downbeat financial markets, like we have experienced since the end of 2007, there is natural tendency to become more cautious. To spend less, save more, pay-off debt and, particularly for those close to or in retirement, hold more investment wealth in defensive assets i.e. cash and fixed interest.
We may get a sense of comfort from knowing that the value of our investments cannot fall further and believe we have adopted a sensible, low risk investment strategy. And this is certainly true, if you think that investment risk is measured solely by the volatility of investment returns, pre inflation and tax.
But if the risk you are more concerned about is that you won’t be able to live the lifestyle you want or that your money might run out before you do, then high levels of defensiveness may be very risky.
How does your “Personal Financial Scorecard” look?
A picture paints a thousand words…
Our recent article, “What is “The Value of Financial Planning”?”, introduced a number of key metrics that we monitor to assess clients’ progress toward meeting their financial objectives. Together with some additional important measures, a “Personal Financial Scorecard” can be created for each client.
This Scorecard succinctly captures financial progress and highlights strengths and weaknesses in a client’s current situation. It’s easy to see whether a client is on track to achieve their desired financial future and what steps they need to take to enhance their financial position.
Transitioning to your target asset allocation
How do you close the gap between your current and target asset allocation?
Our previous article, “Measuring your current asset allocation”, explained how we believe wealth accumulators (those whose after-tax earnings exceed their lifestyle expenditure) should measure their current asset allocation. It requires them to estimate their projected surplus or future capital to add to their Net Investment Wealth, to calculate a measure of total Projected Lifetime Investment Wealth.
Click Here To Read More
Measuring your current asset allocation
You need to know your current asset allocation
In our last article, “Choosing your target asset allocation”, we discussed the key determinants of the choice of your target asset allocation. But in developing an investment strategy designed to reach your target by retirement it is essential to have a meaningful measure of your current asset allocation.
For those who expect to continue to accumulate wealth from business or employment earnings, the traditional ways of measuring asset allocation are not very helpful. A better approach to asset allocation takes advantage of our “Projected Lifetime Investment Wealth” framework. It takes a much broader view of wealth and provides valuable insights relevant to answering many typical personal finance questions e.g. how much could or should I borrow, how should I build my risky growth asset exposure over time, can I afford a larger home.
Click Here To Read More
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:
Click Here To Read More
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.
Click Here To Read More
International shares: To hedge or not to hedge?
Strong Aussie dollar wipes out international share gains …
In our recent article, “Should you hold international shares in your investment portfolio?”, we argued that there are diversification or risk reduction benefits from holding international shares as part of a share portfolio. To keep it manageable, we did not directly address the exchange rate risk that comes with owning shares denominated in another currency.
However, with the Australian dollar (AUD) appreciating 36% against the US dollar (USD) and 25% against the Reserve Bank’s trade weighted basket of currencies over the six months to September 2009, we are concerned that some poor decisions are being made in response.
The past six months has seen strong local currency gains in international shares almost completely offset by exchange rate losses when converted to AUD. This has resulted in some investor disenchantment with international shares. The knee jerk reaction has been to either reduce the international share allocation and/or to choose share funds that are protected against exchange rate movements i.e. hedged.
Click Here To Read More
Should cash distributions drive investment decisions?
Money to live …
It is not at all uncommon for those in retirement and near retirement to be concerned about the amount of cash distributions their investment portfolio is paying. Often, their objective is to be able to live off this cash and, thereby, keep their initial capital intact.
Typically, such investors understand they need to be concerned about the long term safety of their portfolio. But, at the same time they require some scope for capital growth to avoid the possibility that they will run out of money.
Therefore, they tend to go towards a balanced/growth type portfolio, allocating 40-50% to what they consider “defensive” assets and 50-60% to “growth” assets. Provided their asset allocation has been determined appropriately (see “The Asset Allocation Decision”), this sounds eminently sensible.
However, their focus on cash heavily influences the types of “defensive” and “growth” assets they choose. These choices may, in fact, totally undermine their asset allocation decision.
Click Here To Read More
