Where do I invest my savings?
I'M OFTEN asked, 'what do you invest in?'. In my younger days, when I was at uni, I was taught that one-third in fixed interest/cash, one-third in property, and one-third in shares would probably do it.
The reality is that asset allocation is as individual as fingerprints.
If you've put together a diversified portfolio of investments, I would hope you've made a deliberate decision about how your assets are spread. The technical term for this is 'asset allocation'.
The first issue to consider in deciding where to invest, is your age and your attitude to risk.
I don't buy into the view that because I'm in my 60s I've got to be 100% invested in cash. Australians have an average life expectancy of 82, and a 60-something investor like me will hopefully have two or more decades of life ahead, which I is why I'm still a long term investor. Besides, with returns of around 2%, I struggle with term deposits.
I'm highly into Australian equities because the yield is good. A solid chunk of my portfolio is invested in super, which is taxed at 15%. And the franking credits on shares help to wash out any tax paid within my super.
That said, I don't want to be in a position where I have to sell quality assets in a down year. So I hold enough cash for myself and my wife Vicki to survive for two years. The rest I pretty much invest in growth assets including overseas investments and infrastructure assets.
What I'm not interested in, is the pain of a permanent capital loss. The opportunity to earn a big gain just isn't as rewarding for me these days as the concern of long term losses. One of the ways I manage this risk is by regularly rebalancing my portfolio.
Unless your attitude to risk has changed, you should aim to rebalance back to your preferred portfolio mix at least twice a year. Yes, it can mean paying switching fees and in some cases, capital gains tax, but rebalancing has the added appeal of enforced discipline. It counteracts our desire to be greedy, or fearful, by forcing us to sell when assets are expensive and buy when they are cheap.
How does it work?
Well, let's say you want to have one-third of your portfolio invested in Australian shares, and you'll rebalance if this falls or rises by 2%. If your shareholdings rise in value to be 32% of your portfolio, you inevitably sell when shares are expensive.
If the shareholdings fall to 28% of your portfolio and you top up your portfolio, by definition you'll buy when shares are cheap. It's a simple discipline but believe me it works.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.