Deciding on an appropriate asset allocation needs to be one of an investor’s first decisions. Essentially, a good asset allocation strategy diversifies risk and, by doing so, offers some insurance during market downturns. Asset allocation is one of the most important factors in determining outcomes after general market movements.
Asset allocation strategy has to be individually tailored to that client. However, an asset allocation should never be a set-and-forget strategy. It needs to be reviewed regularly and it may have to be adjusted during market cycles.
Appropriate asset allocation will have exposure to both domestic and international Equities. As an example of how international allocation improves performance, $10,000 invested in January 1970 in Australian equities would at the end of October 2018 would be worth $875,250. If it had been invested in international shares it would be worth $921,707 but if it had been invested in cash, it would be worth just $422,497 (not taking into account inflation).
Do you have exposure to the best companies in the world?
“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”
The longer the period that capital is invested, the larger the impact of compounding returns on wealth. Starting to save and invest early in life allows time for returns to compound, resulting in larger amounts of capital later in life when individuals reach an age where they might like to retire.
In order to achieve the maximum benefit from compounding, an investor should:
- invest in a portfolio of companies with superior economics and long-term structural growth i.e. companies that are not reliant on the expansion of the overall economy for their profit growth;
- take a long-term view and be patient, acting like a business owner rather than a share trader;
- reinvest as much of the income and sale proceeds as they can afford, back into the portfolio continually over time; and
- maximize the amount of capital that is invested over time.