How do you change your investment strategy over time as the portfolio value increases?

Welcome to Finance and Fury. This week the topic is from a listener, Gabriel.

That is “how do you change your investment strategy over time as the portfolio value increases? more specifically, how do you see someone building a growth portfolio starting with $10,000 and what would they change when they get to $100,000? What about $1,000,000?”

This is a great topic, thank you for suggesting it.

1. Everyone is different- no one right way to go about this –
   1. I have clients invested in a similar manner with $300k to $2m – because it is the right option to meet there needs – the only difference is how much is invested in each of the types of investments that make up their portfolios
   2. I also have clients with vastly different allocations – but again, this is depending on your needs
      1. Some want long term leveraged growth, so we looked at property or geared share funds
   3. there are some factors that can be used to help determine where someone should invest – which helps to determine an investment strategy based around the level of funds invested
      1. But the best thing to do is look at the end picture – where do you want to be – and build towards that
      2. This will help to answer this question better – to answer ‘what changes should be made once you have accumulated $100k or $1m’, the focus should be more so on what do you need your $100k or $1m to do for you
         1. To explain this further – say your end goal is to have a passive income of $50k p.a. – $1m in todays dollars – can fairly comfortably achieve this – but only if the assets generate an income yield of 5%
         2. Obviously with cost-of-living increases over the years the nominal value you will need is greater
      3. It is great to have $1m, but if this is in cash and you need an income, you are out of luck, as well as if you were invested in one single share that doesn’t pay an income, or even gold
      4. This is why having goals-based investing helps to determine this question
   4. Goals – to help work this out – for long term investment goals, there are considerations to help determine the investment strategy:
      1. Return needs – what returns do you need out of your investment? Returns have two components – growth and income – add these together and you get your total return
         1. Different assets have different return profiles – some are purely growth, others purely income
         2. They also have different factors that affect each of these returns – leverage on property, income of cash versus FF dividend paying shares at the moment
      2. Risk mitigation – do you need to protect your downside? If you are starting off with $10k – you would still probably need to protect from absolute losses. If you have $1m and are looking to retire, you might want to do this also, but is much easier to do with $1m compared to $10k: how can this be done?
         1. Diversification – ways to minimise your risk, in terms of volatility is to spread the risk out
            1. Risks – absolute and speculative – in other words, what is your risk of losing everything versus seeing some downwards price movements that are a natural part of any growth investment?
            2. Using the example above, if you buy one share with your $10k, the risks might be high for both speculative and absolute losses
            3. Now use your $1m to buy 100 companies at $10k a pop – your volatility will go down and so will the absolute loss potential
            4. Now – buy a property for $400k and use the remaining to buy shares – at $10k a pop then
            5. Now – buy a property for $400k, $550k of shares and $50k of gold – the volatility of your overall portfolio will decline further
         2. Defensive allocations versus growth components – Defensive assets

• Both of these factors will change over time as well – as you grow additional wealth, you can start to invest in some defensive assets to help secure your position, as well as purchasing additional assets as part of diversification

1. The costs of the ongoing strategy – Different investment have different costs to them
   1. Looking at the strategy of buying 100 shares, that would cost you $995 with a brokerage platform like selfwealth – not too bad – makes up 0.1% as a transaction cost
   2. But now say you have $10k and want to buy 100 shares for the same diversification – at $100 each, cost you almost 10% of your invested assets to just get into the market

• Changes to a portfolio – CGT costs from rebalancing

4. Also – depending on How are you going to accumulate the wealth over time can help to determine where to invest –
   1. Monthly investing, or saving up and making lump sum investments, or debt repayment and refinancing for equity releases from property
5. All of these combined can help to work out the correct investment strategy – but remember the key factor is the end picture – what these investments need to be able to do for you. This helps to determine:
   1. What types of investments to purchase: shares, etfs, LICs, managed funds, property, gold, BTC
   2. How they should be purchased – directly, on a platform, personally or inside of a trust
6. Also – as a quick note – any changes to investment strategies don’t necessarily mean a change the existing investment allocation, but start investing in additional assets

Now that that is out of the way – Let’s have a look at some examples to go through this

Starting out – options for a $10k investments

1. When starting out with $10k – your options are limited due to the capital size –
   1. Not like you can buy an investment property with this – or purchase a managed fund directly due to minimums with investors
   2. Your options are likely limited to either a share, ETF or LIC or managed funds held on a platform to avoid the minimum
2. Coming back to goals – if you aim is to work your way to $1m to help generate a passive income, what investment can work: Looking at the considerations
   1. Returns needs – depends on your timeframe – but if it is long term, you can generally focus on a good allocation to growth, with any income on top being reinvested in the portfolio
   2. Risk mitigation – This is probably one of the hardest parts when starting with $10k
      1. Direct shares are probably not the best option
   3. Costs for the strategy – share purchases would have the brokerage costs – ETFs, LICs have the brokerage and indirect MERs, platforms for managed funds would have administration costs and MERs for the funds
3. Investment options – not investment advice –
   1. Can use some ETF index funds like Vanguard Diversified High Growth Index ETF (VDHG) – has 7 index funds inside of it – so rather than buying the individual funds, can just buy the one to save on some brokerage
4. This initial step seems relatively simple – for purchasing an initial investment – the big question is how are you are going to build your wealth –
   1. Say you invest $10k in the index, over 10 years the average return is around 9% = $23,673 assuming that you personally cover the distribution tax and that the gross income is reinvested
   2. In 20 years, with the same assumptions, you would reach $56k, in 30 years, around $133k – so it is likely that you will need to put your own financial resources towards this end investment goal, in the form of monthly savings or accumulated savings in one lump sum
   3. Along the way – if you accumulate another level of savings, say another $10k, you can start investing this but also start spreading the investment allocation out –
   4. Technically – to reach $100k in a timely manner – in 10 years, your additional investments would likely be required
5. Not comes the important question – where to invest these funds?
   1. It depends – if you are already holding assets that meet your long-term goals – i.e. passive income levels, then technically do you need to change anything?
   2. But if you invest $10k in a multi-asset index fund initially and want to make monthly investment of $2k p.m. for the next 20 years, this would technically reach $1.4m
   3. However – you would simply have this one ETF – and be paying $9.95 each month in brokerage, or 0.5% in transaction costs – if this ETF meets your needs of distributions, for these funds it has been close to 5% p.a. then this may be a simple strategy but in the end effective
6. I hope this is starting to make sense – there is no one right way to go it – it is important to focus on what you need – changing a portfolio as it grows in value for the sake of changing it may not lead to a better result
7. What having $1m in invested assets allows you to do is have a greater range of potential investment allocations without breaking the bank
   1. Technically you could split this $1m up between the VDHG funds underlying investments, so buy Vas at 36%, and so on until you replicate what this ETF is made up of – or just buy VDHG
   2. The more you have simply allows you to expand into other asset classes with higher cost barriers to entry – like property, with stamp duty as an example as well as deposit requirements

In summary – there is no one right strategy for everyone – because it all depends on what you need out of your investments

1. Hence, first figure out what investments will help you to meet your goals – both in the interim and long term – because I have often found that they are similar
   1. In the interim you want to have a good return –
   2. The one thing to do is rebalance over the years – rather than buying purely high growth investments, can start to diversify into other asset classes as a hedge – this is for those who are more risk adverse
2. Considerations along the way to help determine the investment strategy
   1. Return needs – Say you need long term growth with returns of 8%+ p.a.
   2. Risk mitigation –
      1. Defensive allocations – you don’t need any
      2. Diversification
   3. What would you change when you get to $1m?
      1. Hopefully nothing – beyond making some additional investments on top of what I already held
      2. This is the way I have set up my investments – have about 20 direct shares, a few index ETFs, 4 LICs, portfolio of 12 managed funds – I simply keep adding to my investments over the years
         1. When I started when I was 15 – I only had 2 shares – NAB and TLS not the best long-term investments, but have made many additional ones over the years
      3. Why I don’t like major rebalancing – Major cons with selling down a full $1m portfolio and repurchasing something else is GCT and transaction costs
      4. Instead – Along the way you want to be able to manage the allocation to fine tune this to where you need it to be
      5. But this is done through investing with your end goal in mind

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