How does your asset allocation stack up?

Having worked in the wealth management industry for more than 20 years, I have had the pleasure of working with private clients across the region in the stewardship of their investment portfolios. It is a tremendous responsibility to be entrusted with a portion of a client’s future means of financial well-being. During this period I have assembled what I believe are the keys to not only growing wealth, but also protecting it. One of the key factors to ensuring optimal investment outcomes and protection is asset allocation.

Asset allocation is the implementation of an investment strategy that balances risk and reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame.

More than 80% of a portfolio’s return and risk are determined by this investment policy. Shorter-term tactical decisions and the selection of specific investments or managers are important as well, but only once the fundamental structure of a portfolio has been defined.

In recent years, declines in interest rates have led to healthy returns in most developed bond, property and equity markets. Absence of a severe economic downturn or deflation, both of which seem unlikely in the near term, and returns in high-quality fixed income are likely to be low.

This forces investors to look for alternative sources of return higher up the risk curve. But where to invest is a challenge because global central banks have affected not only fixed income yields but also assets such as stocks and property.

Favouring the local share market is a common and understandable behaviour of Australian investors. Home assets represent an important allocation in all portfolios, however they should not completely dominate. Investing predominantly or exclusively in Australian shares may introduce an unwanted sector bias in a portfolio, such as banks or mining. Moreover, a portfolio may become too exposed to specific economic and monetary cycles.

By contrast, investing globally reduces exposure to individual country risks while providing a broader range of growth opportunities. This was demonstrated in 2016, and our forecast of equity returns for the coming years continues to suggest that investing globally in equities offers useful diversification benefits and growth opportunities.

Alternative Investments are increasingly gaining importance as a cornerstone of diversified portfolios, particularly in a world of low interest rates and yields. Alternatives typically represent 10-15% in a balanced to high-risk profile.

This is broadly in line with that of pension funds and endowments around the world. Alternatives encompass a broadly diversified universe including hedge funds, commodities and private equity. These investments typically respond to different drivers than traditional assets such as bonds and stocks.

They also act as inflation protection in periods of rising inflation, while benefiting from falling yields in periods of declining inflation. They therefore play an attractive role in diversifying, stabilising and indeed optimising portfolios.

Remember, it’s never too late to give your existing portfolio a revamp. Asset allocation is not a one-time event, it’s a life-long process of review and refine. This is the Kelly+Partners Wealth Management system. It is important to also recognise that there is no one standardised solution for allocating your assets. Individual investors require individual solutions.

To arrange a no obligation conversation to discuss your current asset allocation model please contact Trent Doughty.

Trent Doughty
Senior Client Director
Kelly+Partners Private Wealth

trent.doughty@kellypartners.com.au