It is amazing what a difference a year makes. It only seems the other day that property prices were in the doldrums with a record number of listings, no one was interested in investing in the share market and everyone was concerned about the European debt crisis. This contrast is due to record low interest rates, record clearance rates at auctions and the Australian share market attaining its highest level for five years.
No fund manager or economist can predict the future or else why would they working for a living?
One of the keys to successful investing and maximizing your risk adjusted return is asset allocation. Asset allocation is how much you should invest in each of the assets classes such as:
- General shares;
- Australian shares;
- International shares;
- and fixed interest etc;
to minimize your risks and maximize your returns. Frequently asset allocations have been heavily weighted towards Australian shares, cash and property. Whilst this investment strategy may work in times of high interest rates and capital gains in real estate prices, the risk you are taking to achieve the return can be too great. We now have record low interest rates and investors, who were heavily weighted to cash, are scrambling towards other alternatives.
An asset allocation dominated by property may also be too much risk for the return you are receiving.
To minimize the risks of investing, it is important to invest in asset classes which are not highly correlated.A poor return in one asset class maybe compensated by a better return in another. The degree of the diversification between asset classes can extend to hedged or unhedged international shares and bonds.
The asset allocation between the asset classes requires constant review and will take into account political and economic events and forecasts.
It also important to adjust your asset allocation based on your individual circumstances. If you are approaching retirement and your main objective is to protect your capital, then your asset allocation will take on a more defensive outlook.
A Rising Tide Lifts All Boats
In much the same way a rising tide lifts all boats, recent events have seen asset prices increase in general for shares and property. This has resulted in some asset class increases not being based on fundamentals such as earnings growth or yield, in the case of property. It is in these situations where, if there is correction in the share or property markets for one event or another, these over-priced companies and properties will fall furthest and quickest.
In these market conditions, it is important to take an active approach to share selection or any other asset, as the price you pay ultimately will have a large bearing on the return you receive. This can be contrasted with a passive approach to investing where you do not place any importance on which share or property within an asset class.
It is important to review your investment strategy on a regular basis to make sure your allocation allows you to maximize your risk adjust returns. It is also important for you to be aware of the price you are paying for assets, as paying too much when tide goes out, might just catch you swimming naked!
For further information,
Please contact me if you would like to review your investment strategy.
Disclaimers & Disclosures
Geoff Ivanac is Sub-Authorised Representative No. 000309751 of GPS Wealth Ltd (GPS) ABN 17 005 482 726 Australian Financial Services Licence (No 254 544) and can provide the following services financial planning, risk management, managed investments, superannuation and retirement planning, margin lending and self-managed superannuation funds.
The information provided on this website has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your GPS Wealth Ltd (GPS) Adviser before you make any decision regarding any products mentioned in this communication. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither GPS nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.