One of the most important decisions you can make in building or maintaining your wealth is asset allocation – that is, deciding which assets to invest in and how much to allocate to each asset class.

An effective investment portfolio will be well diversified. The cause of many financial disasters has been investing the majority of a portfolio in one asset or with one fund manager. The very simple ‘trick’ is to spread your money between asset classes. Historically, allocating money between Australian shares, global shares, real estate investment trusts (REITs, formerly known as listed property trusts) and bonds has been effective because their risk and return characteristics have had a low correlation.

Will this strategy always work? What will happen if the current volatility in global share markets continues? If the other asset classes have a low correlation to shares you would expect it all to balance out over time. Or does it?

Bonds – short term interest rates around the world are at historically low levels. Bond yields are increasing, which is not an easy environment.

Global shares – as globalisation continues, world economies (and hence share prices) are much more closely related. The level of correlation between share markets has increased and returns move in the same way as Australian shares.

REITs Australian REITs have experienced high volatility with average returns ranging from -55.3% to +9.6% since 2008 with the two most recent years continuing to show negative returns.

The search is on to find reliable fund managers investing in asset classes with a low correlation to traditional assets.

Alternative asset classes

Possible alternatives are:

  • Private equity – direct company ownership. Companies can be well-established (such as Myer, which was previously owned by a private equity group) companies or start-ups. Private equity funds are not commonly offered directly to investors, and they tend to be long-term investments (at least seven years) with little or no liquidity.
  • Global infrastructure – investing in assets such as roads, airports and power generation can provide a guaranteed income stream and potential capital growth.
  • Absolute return funds – fund managers who identify opportunities to produce returns in all market conditions using a mix of traditional and innovative asset selection and management techniques.

Talk to us today if you want your portfolio to have ‘downside protection’.


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