And this makes perfect sense of course. Investments do play a major role in wealth creation.
We find however, that it’s very easy to get caught up in the ‘what’ of investing. By this we mean that frequently the conversation turns to what ‘product’ a client should invest in. This could be a discussion about what shares to buy, which fund manager to invest in, or which property to purchase (to name just a few examples).
We understand why clients are interested in the ‘what’. But what we know from experience is that it’s the ‘how’ that has the strongest bearing on portfolio performance.
And the ‘how’ has a lot to do with asset allocation. Asset allocation focuses on diversifying your investments across different asset classes (cash, fixed interest, property and shares), helping to buffer the impact of falls in any particular one.
By not ‘putting all your eggs in one basket’, you reduce the risk of all of your investments falling in value at the same time. As a result, you are more likely to enjoy a ‘smoother’ investment journey that offers better capital protection, which in turn drives higher compound returns from your total portfolio.
Adjusting your asset allocation mix
Each asset class offers varying levels of risk and potential return. For example, cash sits at the end of the spectrum that typically offers low risk and low return. Conversely, equities (including Australian and international shares) are regarded as offering relatively high risk and high return.
The proportion of each that is recommended for your investment portfolio will be influenced by how comfortable you feel with the tradeoff between different levels of risk and return.
Your financial goals – and the timeframe you want to achieve them in – are also important factors in developing a customised asset allocation for you.
The likely tax implications of different options (including how your investments are owned) will also have a huge bearing on the earnings potential, security and liquidity of your investment. Plus the underlying costs associated with the investment should be considered, as this will reduce your investment capital (which in turn means there is less for you to be earning a return on).
As you can see, there are multiple factors to think about when planning how to optimise your investments.
At 5 Financial, our investment recommendations are built on insights developed over many years of helping hundreds of clients to grow their wealth. We also use sophisticated financial software to model likely outcomes that can be attained under various scenarios. This helps take the guesswork out of the equation, creating a greater sense of certainty about what you can achieve and how best to achieve it.
You can read more about the merits of focusing on strategy instead of structure in this article by Robin Bowerman, Principal, Market Strategy and Communications at Vanguard Australia.
We’d be pleased to discuss with you how you can optimise the performance of your investments and align them with your broader life goals. You are very welcome to book a free, no obligation consultation with one of our wealth management advisers to learn more. Contact us today to book a time.