Author: Leigh Jobling, Partner, TAG Financial Services
The last year may have you questioning your investment portfolio strategy. Before making any changes, it’s best to look at some investment theories and historical facts.
To start with, we all know that an investment strategy can be conservative, aggressive or somewhere in between. It also generally involves investing in a diversified mix of different asset classes including:
The amount invested in each depends on the agreed investment approach that helps you achieve your goals.
Portfolio Theory
Having a diversified mix of investments across multiple asset classes can help smooth out returns over time. Portfolio theory suggests that when growth assets such as shares go down, government bonds and other more defensive assets provide some stability and perform better (as investors leave the share market and seek the safety of bonds). The reverse is also true when investors feel more confident investing in growth assets and these increase in value, the defensive assets may underperform – but overall a reasonable return is achieved.
Given no one knows how markets will perform in the short term. Having a spread of investments means that risk can be managed, while reasonable longer-term returns can be expected over time. It does involve a little fence-sitting, but has stood the test of time for many, many decades.
The Last 30 Years
The Vanguard chart below shows various asset classes over the past 30 years ranked from best to worst:
©2022 Vanguard Investments Australia Ltd. All rights reserved. Re-produced with permission.
Although the chart is a bit busy, the main idea is that a particular asset class can be one of the better performers in any given year, and one of the worst the next. By in large when growth assets are the better performers, defensive assets are amongst the worst and vice-versa. Also, in each year, the top few asset classes have produced positive returns.
What about the last 12 months?
In the year ended 30 June 2022, given the very fast and dramatic increase in inflation and the response of central banks with aggressive interest rate increases, many different markets were caught off guard. As a result:
- Share markets performed poorly
- Bond markets also experienced their biggest correction in 60 years.
- In the 30 years, 2022 is the only year that cash (with a whopping 0.1% return) produced the only positive return.
Investing throws up curve balls from time to time. 2022 will be one for the history books and we look forward to more “normal” market conditions into the future.
The basis of a sound financial plan
We always recommend the following steps to a sound financial plan:
- Understand your goals and objectives
Be able to articulate them in terms of $$ and timeframes - Develop your financial strategy
Focusing on your goals - Work out your personal investment preferences
This includes your attitudes to risk and return - Test those preferences against long range financial projections
Will you be OK financially now and in the future?? - Agree on an appropriate investment strategy
- Regularly review the financial strategy
This should include the investments approach to ensure your stated (and changing) goals are more likely than not to be satisfied
- Understand your goals and objectives
Any questions?
If you are not sure if you (or someone you love) will be financially OK and want to explore what you can do to help secure your future, contact one of our advisers on 03 9886 0800 or via email.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2022. Please do not reproduce without the expressed written consent of the author.