How To Build Your Investment Portfolio
MBA, BSc, DipFP
Financial Planner / Managing Partner
How To Build Your Investment Portfolio – Assets, Risk & Return
(00:00): In this video, I’ll be talking about asset allocation, where to invest and what level of growth, income, and risk you should expect. Hi, it’s Raffi from Manly Financial Services. And in this video, we’re going to talk about asset allocation. But before we start, two things we won’t be talking about.
(00:22): We won’t be talking about investing in just one asset class, be it property or whatever it may be. There’s a lot of videos on YouTube about buying one investment property and then buying a second one, a third one and a fourth one. We’re not going to be talking about that.
(00:35): Our approach as financial planners is putting together a diversified portfolio that’s going to help reduce risk and achieve your goals over the long term no matter what the investment cycle is giving.
(00:45): The second thing we won’t be talking about here are any get rich quick schemes as our focus is primarily establishing a core portfolio of diversified assets around which a satellite approach can be used and by satellite, I’m talking about different assets being alternative investments, alternative asset classes, maybe cryptocurrency, all sorts of things.
(01:06): But that’s really not the focus of this video. The focus of this video is looking at the traditional asset classes and how to asset allocate across those in a diversified way for your core portfolio.
Where Can We Invest
(01:18): So let’s start. Where can we invest? Well, traditionally there’s really only four asset classes that we can invest in. There’s cash, there’s fixed interest or bonds, there’s property or there’s shares. Now within each of those sections, there’s subsections.
(01:32): For instance in bonds, we can invest in corporate bonds or government bonds, we can invest in mortgages. In property, we can invest in commercial property, residential property, or listed commercial properties that are listed on the ASX, that we can buy and sell every day.
(01:47): In shares we can buy international shares or Australian shares and then within each of those sectors, we can look at different sectors of the market. We can look at different sizes of companies, small companies, mid cap companies, or the big blue chip companies.
Allocating Across The Four Core Traditional Asset Classes
(01:59): When allocating across these four core traditional asset classes, it’s very important for us to keep in mind that each one of these asset classes have some characteristics and those characteristics will determine if investing in these assets is appropriate for us.
(02:14): So the first of these characteristics are whether the asset is a growth asset or a defensive asset. Again, in the versified portfolio, we want to have an allocation to defensive assets that’s going to buffer the portfolio from extreme volatility, that may occur when you’ve got events such as a COVID-19 or a global financial crisis and the ramifications for that on the markets.
(02:34): Now, our defensive asset classes are a cash and fixed interest, whereas our growth asset classes are property shares. When we allocate money to bonds or cash, we expect that all we’re going to receive is interest in the form of income. Whereas when we invest in growth assets, we expect income and growth over that period of time.
(02:53): So from these defensive and growth assets, what type of return would we expect over a longer period of time.
(02:59): Investment return technically has two components. It has an income component and it has a growth component. Now, the defensive asset classes traditionally only really pay the income component.
(03:08): For instance, if I put money in a term deposit or in the bank, I’m only going to achieve investment income in the form of interest. I’m not going to get any capital growth. Whereas if I invest in property or shares, I’m going to get income in the form of dividends and rent, combined with capital appreciation or growth over a period of time.
Risk & Volatility
(03:32): What about risk and volatility? Well, that defensive asset’s, just as the name says, are going to be lower risk assets. Volatility, you want it really occur, especially for a cash asset you want to give volatility it all, possibly in a bond.
(03:44): Depending on the timeframe, you might get a little bit of volatility in terms of the capital value. But traditionally, defensive assets have very little or no volatility and therefore are very little risk.
(03:56): When it comes to our growth assets on the other hand, our property and our share assets, they are going to have some volatility over time, that volatility, or if you look at it from a day-to-day basis can be quite large, especially for shares that are traded on a daily basis on the stock exchange. However, over the medium to longer term, that volatility really gets ironed out.
(04:15): So when we look at these four traditional asset classes and we put them on a chart of risk versus return, We can see that cash and fixed interest will be on the lower return side and definitely at our risk side, whereas our property in shares will be at higher potential return and therefore higher ongoing risk.
Investing Across Asset Classes
(04:32): So how do we allocate across assets for an investor when we’re putting together their core portfolio? We take on two approaches. The first is a goals-based approach, and the second one is a risk profile approach. So firstly, from a goals-based perspective, we look at what they want to achieve over the short term, the medium term, and the long term.
(04:48): Our assets that are going to be less volatile should be in that short-term bucket and medium term bucket, can take assets that are going to have a little bit more volatility, because we’ve got more time to iron out that volatility and the higher risk assets in the longer term bucket.
Attitudes To Risk
(05:04): The second thing we’re going to be looking at is their attitudes to risk via a risk profiling tool to understand the client’s most appropriate level or comfortable level of investment risk and volatility.
(05:15): Now, as you can tell from a lot of this information, it is highly specific and specialized for the client. Therefore, this video only is talking in a general perspective and is only general advice. It’s not giving any specific advice that anyone should act on because obviously it doesn’t consider the circumstances of any of you viewers.
(05:33): To look at our full general advice disclaimer, please look at the description in this video.
(05:38): I hope you found this video of interest and if you’d like some more information, please visit our website at manlyfs.com.au and please get in contact so we can see if we can help you. Please like, subscribe, and leave a comment and click the notifications bell to we notify of any upcoming videos. Thank you.Interested in knowing more?