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/

 

What would you do if you won the lotto?

Welcome to Finance and Fury Have you ever thought about What would you do if you won the lotto? What would you do with it? This depends on many things: the size, type of lifestyle, and how much you value money now. Today: Talk about how winners end up with no money...

Furious Friday: Is social media at a tipping point?

Furious Friday Is social media at a tipping point? Today we’re looking at the market environment for Facebook, Google, Twitter, YouTube etc… their costs are going to far outpace what their revenues will be. Are they on their way up, or on their way down? EU copyright...

Furious Fridays: What happens if the EU collapses?

Furious Friday What happens if the EU collapses? Welcome to Finance & Fury, the Furious Friday edition. For the past few weeks we’ve been talking about the EU and this week we’ll finish up by looking at the flow on effects of the EU breaking up. There’s no way to...

El Salvador and Bitcoin – a match made in heaven?

Welcome to Finance and Fury. This episode we will continue to look at what is happening in crypto markets. After last episode, we are starting a bit of a mini-series on crypto and digital currencies. This wasn’t originally intended but I have been doing more of a deep...

Furious Fridays: Is progressivism the destroyer of equal opportunity?

Welcome everyone to Finance and Fury, the Furious Friday edition. Today’s episode is part 5 of the miniseries. The last part looked at the ‘fair go’, what is fair for some, isn’t for others. Nearing the end of the series, I want to put forward a case. The constant...

How to not get tricked by election promises!

Welcome to Finance and Fury, the Furious Friday edition This is a continuation from this week’s Say What Wednesday episode, in part one on Who to vote for? Check it out here. Part 1: Political culture Tribalism 3 main parties policies and promises Today: How to tell...

Say What Wednesdays: The Trump Economy

Say What Wednesday The Trump Economy Today, we’re talking about the Trump economy, and the state of the US market. Love him or hate him, America is doing better than ever – Trump just can’t stop winning when it comes to a lot of political and economic factors. In his...

The superannuation changes coming to an account near you.

Welcome to Finance and Fury. In this episode – want to look at the proposals for the superannuation industry overhaul – released in the latest budget – as there are some pretty big changes – In the budget – the super system is likely to be in for a shake up due to the...

Say What Wednesday: Welcome to the Wild West

Say What Wednesdays Welcome to the Wild West Welcome to Say What Wednesday This week we’re going to answer some of the burning questions that have been on a lot of peoples’ minds around the banking royal commission…and rather than repeat everything you’ve been hearing...

Furious Friday: What are the 4 Cons for Supply-side Economics?

Welcome to Finance and Fury, the Furious Friday edition. We are continuing the series on supply-side economics. Today we will focus on the down-side of supply-side economics. Remember, supply-side economics believes that governments should remove barriers to...

Pin It on Pinterest

Share This