Eight tips for investment success

The Australian Financial Review (02.09.17) published six lessons for investors:

  1. Hold your line
  2. Review listed property
  3. Choose equities long term
  4. Cut risk closer to retirement
  5. Rethink bonds
  6. Don’t rely on the past

I would add two more: 

  1. Diversification provides protection
  2. Rebalancing is the key

Diversification

Diversification is paramount. Consider if you’d just invested in equities. Over the long term (30 years) equities have generated some of the largest gains since July 1987. They have also seen some extreme volatility.  Not all investors can cope with such volatility.

Spreading your invested wealth across a range of asset classes is likely to provide you with strong returns over time but reduce volatility to your asset base. 

The mix of your spread – that is your allocation to each of the asset types – will determine your overall return, as well as the level of volatility.

For those who can cope with volatility, a higher allocation to equities might have a greater long term outcome.  But if you want to sleep easy at night, a lower allocation to equities would be advised.

Your life objectives will determine the allocation to asset types required to meet your goals.

Rebalancing

Constant review and rebalancing of your investment portfolio is essential.

It is one thing to spread your wealth across a range of different asset classes but such a strategy is somewhat ineffective unless you rebalance your investments back to your target asset spread. Without rebalancing your investments, your wealth simply moves up and down with the whims of the markets. 

Rebalancing requires you to sell an asset class when it has risen and purchase an asset class when it has fallen in price. 

For example, consider a simple investment portfolio that has 50% in shares and 50% in fixed interest.

If you don’t rebalance: and share prices rise, the proportion of your portfolio held in shares would increase due to the rise in the share prices. Your portfolio is no longer 50/50 and you are carrying the risk of loss should the shares retrace their gains.

If you do rebalance: you would sell shares and buy fixed interest to rebalance the portfolio to 50/50 mix. This locks in some of the gains in the shares and protects the value by investing those gains into secure fixed interest. Similarly, should share prices fall, the required action would be to sell fixed interest and buy shares to rebalance the portfolio.

Rebalancing your portfolio helps your investments remain on track, giving you the best chance to achieve your goals and objectives. 

How often you rebalance your investments will depend on a range of factors

  1. The size of your portfolio
  2. The types of investments held
  3. Whether you regularly adding to your investments.

Rebalancing can be a difficult process. When markets are rising it is emotionally difficult to sell.  And when markets are falling, buying some of the falling assets may feel counterintuitive.  Removing emotion from investment decisions can be hard. That is why using an independent financial planner is important. A qualified financial advisor can guide you through the bumps and grooves in the market, helping you to reach your end goal.

Hewison Private Wealth is a Melbourne based independent financial advice firm. Our financial advisors are highly qualified wealth managers and superannuation / SMSF experts. If you would like to speak to a financial advisor on how you can secure your financial future through asset allocation and portfolio rebalancing please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.au

Original artilce in The Australian Financial Review 02.09.17

The information provided above is general information only.  It does not consider your needs, financial situation or objectives. You should seek specialised advice from a qualified financial adviser

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