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The perfect investment mix
Finance & Fury Podcast
English - August 08, 2018 01:23 - 17 minutes - 15.7 MB - ★★★★ - 4 ratingsInvesting Business Education wealthhappinessfinance Homepage Download Apple Podcasts Google Podcasts Overcast Castro Pocket Casts RSS feed
Today’s Say What Wednesday question is from Linus. Linus asks, ‘I was just wondering what you think the ideal weighting of Australian (ASX200) ETFs, similar international ETFs and Bonds is in an investment portfolio? Love the show, thanks.’
There’re a few things to cover off here!
The ideal weighting of Asset allocations; that is, how much you have allocated to Australian Shares, to International shares, to Bonds, etc.
To determine the ideal weighting there are 3 questions that need to be asked:
But, it can also help long term.
Portfolio construction – What you need to know
Which asset classes you need? How much should you allocate to each of these asset classes? Which investments should you choose within each asset class?No. 1. Asset Classes
Selecting the correct mix of Income and Growth
No.2 Risk profile
To determine the allocation to each class, you need to determine your capacity to deal with risk.
The traditional way - Risk Profiles (which provides an outline but is not a perfect science). These help to get an idea about how much growth is acceptable.
High Growth – 100% to Growth investments like shares and property – Longer term 8+ years Growth – 80% to growth – Longer Term – 7+ years Cash, Fixed Interest of 20% Balanced – 65% to growth – Min timeframe of about 6 years Cash, Fixed Interest of 35% Conservative – 50% growth Cash, Fixed Interest of 50% Defensive – 30% growth – Good to minimise volatility, shorter term investments or those from which you’re drawing an income Cash, Fixed Interest of 70%No.3 Selecting the investments within each asset class
DefensiveGenerally for either income or capital protection Cash – How much income do you need? Do you have a need for reserves? Fixed Interest – Australian or International. Credit, Alternatives, or Bonds Higher risk (e.g. Corporate debt) - higher yields Growth Australian Shares – Market caps – Selecting a good weighting between asset classes ASX200 – Large Cap allocation Small cap ETFs – Issue is when they are passive International Shares – different countries and market cap
Balancing your desired return with how much risk (volatility) you can afford
Risk - Volatility - Potential movements in price around a mean average High potential for movements, considered higher risk Speculative risk - Can become absolute risk (i.e. losing everything) but can be avoided through proper diversification (which is the whole point of asset allocation) Returns - The higher the levels of volatility, the higher the expected return should be Risk-return relationship – Less invested in assets that can lose value, lower the allocation to assets that don’t grow in value If something can’t gain value, it is harder for it to lose valueBack to Linus’ question: Ideal Weighting / Perfect allocation
What is the purpose, timeframe and return needed? Example #1 – purpose is to invest for the long term to maximise wealth, investing every few months You are tolerant to risk (not spooked out by volatility) and have about 20+ years to invest, plus you’re going to make ongoing investments Allocation – Growth to high growth may be appropriate. For example, 0-20% Fixed interest (cash can be minimised) Allocation: 20% to FI, 20% to LargeCap Aus shares, 10% to MidCap Aus shares, 10% to Smallcap Aus shares, 20% to LargeCap International shares, 10% to Emerging Market International shares, 10% to Infrastructure What this is looking to achieve – Large long-term returns, leverage volatility to take advantage of ongoing investments, have best chance of maximising the balance Example #2 – Purpose is to invest to generate a passive income with minimal volatility Pretty scared about volatility, you want to achieve a better income return than your cash, but don’t want to see portfolio drop more than 15% Allocation – Conservative – Over 50% Defensive (depending on timeframes) Allocation: 20% to Aus Fixed Interest, 30% to Int Fixed Interest, 15% cash, 30% to Aus shares – mostly large cap, 15% to International shares – again, mostly large cap What this is looking to achieve – Greater return than cash, likely to not drop below 15% loss overallConclusion – First just ask what the purpose of the investment is
What you will need out of the investment? Growth, stability, income? – Determines the Income/Growth Relationship What investment mix will achieve this? i.e. how much to growth or defensive (Risk profiles) Long term high growth – Greater amounts to growth investments Capital stability – More in to investments that don’t lose much in value historically What allocation within each asset class is needed? Fixed Interest – High yield or safe AAA rated bonds Shares – Emerging markets or allocation to smaller cap allocations Does this suit my risk tolerance? Yes – Good allocation No – Do I need to accept the additional risk? There’s more than one way to skin a catThanks for the question Linus!
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