Asset allocation is about Managing Risk as well as Making Money

Call us on 07 578 3863 if you'd like to discuss your asset allocation strategy.

We have access to forward looking research and tools to help you come up with an allocation you can understand and are comfortable with.

One of the key lessons experienced investors learn is the need for investors to actively keep a close eye on the balance of their investment portfolios.  Many investors who rode the technology boom of 1998 -1999 and early 2000 ignored their changing portfolio asset allocation. They thought the market couldn’t fall in the new high technology world order – wrong!

The weightings were skewed by the out performance experienced and they then failed to reduce the weighting as the market rose. Had they heeded prudence, they would have kept a large chunk of the profits (and capital) instead of seeing them disappear as the market crashed back to earth.

Those overweight finance company debentures paying high interest rates pre 2008 learnt the same lesson and those overweight fixed interest have found the same thing over the past few years. And just now who knows what will happen to residential property prices?

 Research studies time and again confirm that when looking at portfolio performance over time periods of up to 40 years, 76 per cent of the return was due to the asset allocation.

But the impact of human psychology and greed or ignorance cannot be overstated.  Selling out of an investment that has made you 10, 20, 30 or even 100 per cent and then investing into an asset that has not done so well in recent times or even may have lost you a little money is a lot easier said than done.

At the moment a lot of people are discussing the boom in residential property prices.  Almost inevitably this type of debate tends to quickly turn into cash, versus shares versus property argument or worse, about costs.  We are sad about that as the argument misses a fundamental point.  It is not about whether one is better than the other but rather about the total picture - what does your whole portfolio look like?

We don't think that the share market has reached the same heights of "irrational exuberance" that was experienced then, but it has gone up quite a lot over the last few years, albeit from a low base post 2008. Many people are sitting on very healthy profits.

Prudent asset allocation is as much about managing risk as it is about making money. Trying to time a move from one asset class to another, is according to many studies, almost the hardest investment decision to get right.  Even property markets can be volatile so the idea is to take advantage of some diversification. Rebalance your portfolio so you are comfortable.

Another critical decision in asset-allocation is how much do you hold in fixed interest and cash. The decision to stay in fixed interest is generally regarded safe - and if the interest rate delivers your short to medium term needs you need to do little or nothing else. But at current interest rates many are reluctant to earn next to nothing.

But for those folk who need to grow their money, to stay in cash is a market-timing decision. Giving your capital a ‘cup of tea’ if you like. The question; what is it going to take to finish your tea break? Will it be another rise or fall in the sharemarket, an interest rate hike, inflation heating up another point or two or a softening or crash in property prices.

For savvy investors, those questions are answered with a clear understanding of what their asset allocation is today. Which assets too hold, to have many or few in a portfolio, direct or indirect - at the right stage in your lifetime - is the million dollar question.