How should I rebalance my growth portfolio?

170221.Rebalancing

The key decision is your defensive versus growth allocation

It is a key element of our approach to investment risk management that you should select a target asset allocation that is consistent with your attitude to risk (i.e. a level of investment risk that will enable you to “sleep well”, regardless of what investment markets are doing). The target is to be met at or before your desired retirement date and/or by the time you wish to be financially independent (i.e. have sufficient investment wealth to support your desired lifestyle, without the need to work).

The target asset allocation is primarily focused on your mix of defensive assets (i.e. cash, fixed interest) and growth assets (i.e. primarily, Australian and international shares, and property). If the current defensive/growth allocation varies from target, we work with clients to develop and implement a strategy to transition over time from where they are now to that target.

We also agree with clients how they allocate the growth component of their investment portfolio between the primary growth asset classes i.e. Australian shares, international shares and property. While this allocation decision is both part art and part science, most investors (both in Australia and around the world) tend to have a strong “home company bias” i.e. Australian investors tend to heavily overweight Australian shares and property, despite our markets only being a small percentage of global share and property markets.

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The only free lunch(es) in finance

The only free lunch(es) in finance
The investment equivalent of par golf

One of our four key investment philosophies is that “Diversification is key”. Effective diversification requires you to invest in broad based asset portfolios of every asset class where risk is rewarded over the long term in a strong and reliable manner.

Diversification provides the opportunity to reduce investment risk, without reducing expected return. As such, it is often described as “the only free lunch in finance”. But when combined with the practice of rebalancing your investment portfolio on a regular basis to target asset allocations, in order to preserve a desired risk exposure, a “free” return benefit may also arise (i.e. “the rebalancing effect”).

The discipline of regularly reducing exposure to asset classes when they become overweight, due to relative outperformance, and increasing exposure to relatively underperforming asset classes imposes a desirable “buy low, sell high” bias to an investment portfolio. Provided asset class values move differently, but generally have extended periods of relative outperformance and underperformance, rebalancing will not only serve to maintain a desired risk exposure but also enhance investment return.

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What we know now is no guide to future investment returns


Asset prices quickly reflect everything we know

What we know now is no guide to future investment returnsA fundamental tenet of our investment philosophy is that markets do a pretty good job in quickly incorporating information into asset prices. Current prices reflect a consensus of all past and current information. While these prices may not be “correct”, whatever that means, the robust academic research has revealed that it’s extremely difficult to reliably outperform the market consensus.

An implication for investors is that what we know now is likely to have little relevance for future investment returns, as this information is already incorporated in current prices of investment assets. It is only new, and, therefore, unknown, information that will lead to price changes.

But, for most, it is very hard to accept the notion that the vast majority of the information we are constantly bombarded with by the financial media and economic forecasters is virtually useless for making sound investment decisions. Being well informed about what’s happening now, or in the past, doesn’t give us a head start in predicting future investment returns.

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Investing without feeling or forecasting

Investing without feeling or forecasting

You don’t need to feel or forecast for a good investment experience

In our previous article, we warned of the dangers of letting both your emotions and predictions/forecasts influence investment decisions. Often, your feelings will provide exactly the wrong guide to appropriate action.

But if you aren’t to rely on feelings and/or forecasts, how do you make investment decisions. One approach, that we favour, is to determine an appropriate risk exposure or asset allocation for you, based on:

  • Your attitude for risk;
  • Your need for risk; and
  • Your capacity for risk.

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Managing investment uncertainty

Managing investment uncertaintyMost investors should hold a combination of defensive and growth assets

In our last article, we explained why we don’t think that the past five years of poor share market investment performance provides sufficient evidence that the investment world has changed i.e. we don’t yet believe there has been a paradigm shift.

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Should Gen X ever desert the share market?

Should Gen X ever desert the share market?Gen Xers should be rejoicing

An article in “The New York Times” of 29 May 2012 titled “Younger Investors Jaded About the Stock Market, Survey Finds”, reported that a survey commissioned by Charles Schwab & Company revealed:

“About a third of Americans aged 18-34 said they planned to pull money out of the stock market and were most likely to “sit on the sidelines” in the next six months”.

The gist of the article was that young adults had been scarred by the stock market performance of the past 4-5 years and, accordingly, were reluctant to take investment risk. We would expect to find that Australian Gen Xers have a similar attitude.

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The Allure of Gold

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).

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Is a 100% defensive portfolio low risk?

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.

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How does your “Personal Financial Scorecard” look?

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.

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Transitioning to your target asset allocation

Transitioning to your target asset allocationHow 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.
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