The gymnastics of keeping your portfolio balanced
One of the great things about the summer Olympic Games is that every four years you get to appreciate athletes and sports that don't enjoy saturation-level TV coverage.
Gymnastics is a personal favourite with the different apparatus that challenge and showcase athletic grace, strength, technical abilities and blend them together into real-life drama. There are few other sports where there is the constant risk factor that comes from the slightest slip or loss of balance.
No-one needs to tell a gymnast the value of maintaining balance. And no-one watching Olympic gymnasts is in any doubt about the hard work and dedication - usually from a young age - that has gone into getting to that point.
Investors on the other hand often grapple with the issue of balance. At investor education seminars it is not uncommon to hear investors describe themselves as "property" investors or "share" investors or even as members of the ultra-conservative group that trust nothing other than bank deposits.
Building a balanced portfolio is not nearly as hard as making an Olympic gymnastic team but it does require discipline and a level of self-awareness particularly on how much risk you are comfortable taking.
The good news for investors is that unlike gymnastic routines, one small slip is unlikely to be devastating in terms of long-term portfolio performance. However, allowing portfolios to slip too far out of your risk comfort zone can be significant - particularly when a major market event like a global financial crisis comes along.
So there are two key issues for investors - setting the right asset allocation and rebalancing to stay within your risk "flags".
Understanding where to plant your risk "flags" has to be driven by your personal situation - age, financial situation, health, earnings capacity. If you are in career-best form, naturally your capacity to take risk will be significantly higher than the person about to retire.
The simplest way for most people is to invest in a multi-sector product offered by fund managers that typically are designed around a target level of risk - they range in flavours from conservative, balanced, growth or high growth.
The same applies with superannuation for retirement savings - the default MySuper products typically cluster around a 70/30 growth to income asset split but you can opt for lower or higher exposures to growth assets. With both super and non-super funds the rebalancing of the portfolio happens automatically.
It is when you drill down into the component parts of a portfolio that the complexity increases. The good news for investors who do not want to spend a lot of time on things like their portfolio's asset allocation is that well-tested market solutions are available.
There are a significant group of people who have opted - via setting up a self-managed super fund - to be more engaged in managing their investments (particularly their super but let's assume non-super investments as well). More engagement/involvement by investors is generally regarded as a good thing and around half of SMSFs work with a range of professional advisers to manage and invest their fund.
But the results of the recent Vanguard/Investment Trends survey highlights the fact that a lot of SMSFs have relatively concentrated portfolios. The survey of more than 3500 SMSF trustees found that 38 per cent of their portfolio is invested in Australian shares. And of those, 28 per cent have at least half their share portfolio in bank/financial companies.
This raises the issue of concentration risk within SMSF portfolios - an ongoing debate within the super industry and financial advisory circles over many years. The reasons behind the concentrated Australian share portfolios is reasonably well understood - about half the assets are in pension or drawdown mode and high dividend payout shares are attractive courtesy of the dividend imputation system providing tax credits and the income stream that provides. Wind back time to a few years ago and term deposits were also paying respectable yields so one of the primary objectives - to pay an income stream - could be comfortably achieved with the simple combination of share dividends and cash investments.
About now, given worldwide declining interest rates that Australia is not immune from, the average SMSF portfolio may be feeling like a gymnast that has just discovered their standard routine is no longer working as it did in the past.
The question is how to recover that sense of balance.
The Investment Trends research suggests SMSFs are already taking steps on the journey to diversify their asset allocation because the use of managed funds and ETFs has been rising steadily in recent years.
SMSF trustees are also flagging that they need - and are seeking - more advice.
So while setting the right asset allocation at a fund's portfolio level is important the process of building a broader, holistic financial plan that takes into account assets both within and outside the SMSF that widens the frame of the asset allocation question can help get the balance right between the risks and potential returns.
This article first appeared in the Australian Financial Review on 7 September 2016.
Robin Bowerman
Head of Market Strategy and Communications at Vanguard.
11 September 2016
29 August 2016
Hot Issues
- ATO encourages trustees to use voluntary disclosure service
- Beware of terminal illness payout time frame
- Capital losses can help reduce NALI
- Investment and economic outlook, August 2024
- What the Reserve Bank’s rates stance means for property borrowers
- How investing regularly can propel your returns
- Super sector in ASIC’s sights
- Most Popular Operating Systems 1999 - 2022
- Our investment and economic outlook, July 2024
- Striking a balance in the new financial year
- The five reasons why the $A is likely to rise further - if recession is avoided
- What super fund members should know when comparing returns
- Insurance inside super has tax advantages
- It’s never too early to start talking about aged care with clients
- Capacity doubts now more common
- Most Gold Medals in Summer Olympic Games (1896-2024)
- SMSF assets reach record levels amid share market rally
- Many Australians have a fear of running out
- How to get into the retirement comfort zone
- NALE bill passed by parliament
- Compliance focus impacts wind-ups
- LRBA interest rates increase for 2025
- Income-free areas set to increase from 1 July
- Most Spoken Languages in the World
- Middle-to-higher incomes boosting SMSF growth
- Investment and economic outlook, May 2024
- Transitioning into retirement: What you should know
- Plan now to take advantage of stage 3 tax cuts
- Deeming freeze a win for Age Pensioners
Article archive
- April - June 2024
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
- January - March 2015
- October - December 2014
July - September 2016 archive
- The gymnastics of keeping your portfolio balanced
- Market Update – August 2016
- Stop!! Don't do a paper Budget, use our online budgeting tools instead.
- Advisers the key to retirement stability, research shows
- The toughest tasks for self-managed super
- Lawyer warns on ‘adverse’ death taxes with insurance
- Don't get distracted by super changes
- A savings mirage?
- Market Update - July 2016
- The three biggest economic issues likely to affect markets in 2016
- SMSFs warned on looming property ‘tough times’
- Diversification counts when uncertainty beckons
- Strong economic data stablises markets
- Starting a super pension in 2016-17?
- Market Update - June 2016
- ATO extends looming SuperStream deadline
- ATO's deadline for review non-arm's length LRBAs extended
- A paradoxical relationship: The self-employed and super
- Fresh SMSF documentation warnings surface