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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Will share returns remain low?

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Share and cash investment returns are unexciting

It feels like the Australian share market has been going up and down in about the same spot for the past six or seven years. Many are becoming disillusioned with shares as an investment class and are looking to “juice returns” with the various hybrid structures and private equity “opportunities” on offer to take advantage of the discontent.

Cash, in the form of term deposits, has also lost its lustre, with yields at record lows. It’s not surprising that in this environment the perennial favourite, direct investment into residential property, has become even more popular. The house price rises experienced over the past three or four years, particularly in Sydney and Melbourne, make the share market appear a pretty dull alternative.

This article examines some of the historical facts that underpin current feelings. While we don’t know what will happen in the future, the past suggests that current investment returns are not inconsistent with what investment theory would expect and may not be a good guide to future investment returns.

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How much investment risk can you bear?

How much investment risk can you bear?
Your allocation to growth assets is a key measure of investment risk

In our previous article in our series on the Personal Financial Dashboard – a graphic format that succinctly captures the journey to, arrival at and maintenance of financial independence – we discussed the need to be tax aware when investing. Financial independence is harder to achieve if there is an unnecessarily large tax leakage.

But tax shouldn’t be the overriding factor when making investment decisions. Rather, the primary focus should be on risk and related return. The Personal Financial Dashboard includes two charts which look at key aspects of investment risk management i.e.:

  1.  the Growth  Asset Allocation Ratio (Chart 5); and
  2. the Diversification Ratio (Chart 6).

In this article we focus on the Growth Asset Allocation Ratio (“GAAR”). The Diversification Ratio is discussed in our next article.

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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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Understanding asset allocation

Understanding asset allocationAsset 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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Wealth Management: a risky business

Share and property investments are risky …Wealth Management: a risky business

Most people understand that the returns of growth investments (i.e. shares and property) fluctuate considerably. If they didn’t prior to the Global Financial Crisis, they most certainly have a better grasp of that now.

But most don’t really have a good understanding of the potential range of variation of returns, without anything particularly unusual happening. And nor do they appreciate how dramatically the pattern of returns can affect long term wealth outcomes.

We use the Australian share market experience of the 25 years to December 2009 to shed some light.
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Should cash distributions drive investment decisions?

Cash distributionsMoney 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.
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Is there value in trying to time your entry & exit from the market?

This article aims to address the pros and cons of the investment strategy known as ‘market timing’.

Market timing is the strategy of making buy or sell decisions of financial assets by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions and the strategy is based on the outlook for the market as a whole, rather than for a particular financial asset.

The aim of the market timing strategy is essentially to switch between growth assets and defensive assets in order to generate a better risk adjusted return than that from holding a strategic combination of both asset types. When the future looks bleak, the market timer reduces their exposure to growth assets and increases their exposure to defensive assets. When the future begins to look rosier, they will begin to increase their exposure to growth assets at the expense of defensive assets.

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