Welcome to Finance and Fury, The Say What Wednesday Edition. 

Where each week we answer a question from you.

Hi Louis,

I have a questions about portfolio construction and asset allocation. I am 36 years old and am trying to understand what is the most appropriate asset allocation to have. There is so much material out by I am looking to build a portfolio that is skewed towards reliable income paying stocks through dividends even in down times and hence have favoured the larger Aussies LICs and ETFs. I am 100% in equities with 80% Aussies Shares (LICs and ETFs) and 20% international (ETFs US and Non US) however trying to understand what does a good portfolio and asset class look like and what are the things I should be further considering. I am looking to maybe add Gold (direct through direct ownership and Gold ETFs) and Bonds as I keep hearing these are good to have for assist in downtime but the income on these are very poor but then also thinking should I be having more international exposure / alternative asset classes like A-REITS/ emerging markets etc however as mentioned I am more focused on ongoing incoming paying stocks. 

Would love to hear your overall high-level thoughts and views. Thanks, Mario  

Three steps – Investing between asset classes – Investing within an asset class 

Finding the right investments to fill them

Asset classes and correlation –

Few things to cover off here

The ideal weighting of Asset allocations is important – Three questions to help determine this:

  1. It depends on the purpose of the investment portfolio. What do you need to achieve?
    1. Long term growth – Trying to maximise the balance
    2. Short term stability – Well diversified portfolio with low exposure to growth
    3. Drawing an income or reinvesting – Type of investment held
  2. How much time you have?
    1. Longer timeframes allow for more planning and take advantage of the long term growth
    2. Being 36 and assuming you won’t need this for 20+ years, the volatility
  3. And how much risk you need?
    1. Returns come in two parts = Income + Growth
    2. If there is growth to the equation, it can lose value – Enter risk – But it can help long term
    3. Bonds – do provide some incomes but yields are low due to higher prices –

 

Portfolio construction –

What you need to know for achieving needs – Three more questions from this

  1. What asset classes you need and how much of each you will need?
  2. What investments within each will you need?

 

First) Asset Classes – Selecting the correct mix of Income and Growth

  1. Go through five big ones – Core to most portfolios (Doesn’t include direct property)
    1. They can be broken down to their purpose – Example – If you need to draw a consistent income, you won’t want much volatility
  2. Asset classes – No growth – Low chance of capital loss (Defensive)
    1. Cash – Interest
    2. Fixed Interest – Coupon payments (FV back at the maturity)
      1. Debt instruments – not all bonds – higher-yielding such as notes but the higher yield is paid due to risks
  3. Asset Classes – Growth – Has a chance of capital loss (Growth)
    1. Australian Shares – Dividends and Price gains (Generally higher Dividends than International shares)
    2. International Shares – smaller dividends and Price gains
    3. Listed Property and Infrastructure – Dividends and Price gains – but more volatility and leveraging risks

 

Second) How to determine the allocation to each class?

The traditional way – Risk Profiles (Outlines but remember, not perfect) – But if income is the goal – focus on asset classes which have more income – Australian Shares

  1. High Growth – 100% to Growth – Longer-term 8+ years
  2. Growth – 80% to growth – Longer-Term – 7+ years
    1. Cash, FI of 20%

Third) Selecting the allocation to each asset class

Even though something is defensive it can be income focused.

  1. Defensive – Generally for either income or capital protection
    1. Cash – How much income do you need? Need for reserves?
    2. Fixed Interest – Australian or International. Credit, alternatives or Bonds
      1. Higher risk (Corporate debt) – higher yields
  2. Growth
    1. Australian Shares – Market caps – Selecting a good weighting between asset classes – focus on higher Div paying shares
      1. ASX50 – Large Cap allocation
      2. Small-cap ETFs – Issue is when they are passive
      3. Income paying investments – can focus on higher Div paying/high yield ETFs
      4. ETFs – VAS = 4.1%, VHY = 5.3% but 7.3% grossed up
    2. International Shares – Countries and Market Cap of countries – some countries don’t pay dividends like Aus
      1. Van USA = 1.8% yield – Int Index = 2.4% yield – Average fixed interest index pays higher – Aus FI 3.8%

The aim of each asset allocation: Trying to do a balancing act to determine your risk tolerance

  1. Risk – Volatility – Potential movements in price around a mean average
    1. High potential for movements, considered higher risk
    2. Speculative risk – Can become absolute risk (i.e. losing everything) but can be avoided (Diversification – the whole point of asset allocation) – could buy a few shares that payout 7% Dividend, but volatility may be a killer of returns
  2. Income Focus of returns – want more Div paying companies-
    1. So might be overweight to Aus FF shares – while being underweight to USA lower div paying companies

Back to the Question: Ideal Weighting for an income focus

– general information only – not advice as haven’t taken personal situation into account

  1. What is the purpose, timeframe and return needed?
    1. Purpose is to invest to generate a passive income while trying to minimise volatility
      1. You want to achieve a better income return than cash
      2. Allocation – Growth – about 80% Between shares and infrastructure –
      3. 20% bonds/fixed interest – pays higher incomes that US ETF
      4. Alternatives like gold while providing diversification and capital stability – no income so may not be appropriate
  1. What to watch out for?
    1. REITS – leverage and income payments can come from capital gains – which dry up in downtimes
    2. Large Caps – Mostly Banks/Financials picking up the slack – their incomes may struggle over the next few years
    3. Emerging markets – Likely volatile and may not pay out incomes
    4. Yield trap – prices that drop can reflect a higher yield – without the dividend being paid
      1. Example – $100 share, $5 div = 5% yield – price drops to $50, looks like 10% yield – but may be a reflection of future income losses

  2. Finding the right investments –
    1. ETF structure – flow-through of returns – take what you get, so selecting correct underlying holdings is important
    2. LICs – not flow through dividends – but selected dividends like any normal company – can work in your favour for stability but at expense of growth as gains are reinvested but can be paid out
    3. Select what yields you are after 5-6% – make sure they are high quality

Thanks for listening to today’s episode. 

If you want to get in contact you can do so here: https://financeandfury.com.au/contact/

 

Why has Telstra tanked? Is it a good time to buy, or sell?

Say What Wednesdays Why has Telstra tanked? Is it a good time to buy, or sell? Why has Telstra tanked? For so long, Telstra has been a Market Darling … a great dividend-paying share, almost like the world’s best term deposit…but what has happened? They are out of...

What is the First Home Loan Deposit Scheme? And how to use it?

Welcome to Finance and Fury, the Say What Wednesday Edition  This week’s question comes from Adam Hey Louis, learning lots from your podcast its been good value. My question is now the coalition are remaining in power i want to take advantage of the proposed first...

Gold as a portfolio hedge – Why is the price rising and what are the methods of accessing gold?

Welcome to Finance and Fury,   Today – next gold rush – Final part of capital preservation – Allocation as a hedge for a financial meltdown - should preserve capital, withstand market volatility, and provide diversification across a portfolio Gold – an asset...

Why are some billionaires in favour of a more socialist state?

Welcome to Finance and Fury, the Furious Friday edition. This episode – be looking at the weird combination between socialism and billionaires that is emerging – especially focusing on why billionaires are increasingly becoming in favour of socialism? Or additional...

How do I make an Investment Philosophy?

Welcome to Finance and Fury Today we are going to talk about how to implement an investment philosophy. It is a coherent way of thinking how you fit into your investment plan. It is a mission statement to follow when investing. It can help with understanding the types...

Is rent-to-own a good idea if you are trying to get into the property market?

Welcome to Finance and Fury, the Say What Wednesday edition   Hi Louis, My wife and I a looking for ways to buy a home, given some credit history and income stability challenges. I was hoping to get your thoughts on Rent-to-own arrangements. I really enjoy your...

The future landscape of your superannuation accounts and the rise of the “megafunds”

Welcome to Finance and Fury. The future landscape of superannuation – the rise of megafunds through compelled mergers Numerous bodies, including regulators and government, have been keen for superannuation funds to merge The merging of several larger superannuation...

Can following insider’s trades lead to better investment returns?

Welcome to Finance and Fury. In this episode be looking at one piece of information in the share market – insider trading There is a lot of information in the markets that can be looked at – can look at the fundamentals of an individual company – can also look at...

Why do banks offer offset accounts when it reduces how much money they can make off you?

Welcome to Finance and Fury, The Say What Wednesday edition.  Today's question comes from David Hi Louis, I must commend you on your contribution to the finance community. If you have thought me one thing, it’s that the more you learn the more you realise how little...

Infinite Banking Concept – can you become your own banker?

Welcome to Finance and Fury, The Say What Wednesday Edition. Where we answer your questions. I'm Louis Strange and today's question comes from Mark. Hi Louis, I just heard about IBC (INFINITE BANKING CONCEPT) and I would like to know your input on it. They are saying...

Pin It on Pinterest

Share This