If you’ve had Superannuation for several years, you would have seen that all investment markets have their ups and downs. Regardless of the investor’s experience, turbulent times are a cause of anxiety, and this can lead to poor decision-making.
So, considering the fact that turbulent markets are inevitable, with very unpredictable timing and recoveries, how should portfolios be positioned in anticipation of, and in response to market volatility?
𝐂𝐨𝐧𝐬𝐢𝐝𝐞𝐫 – 𝐖𝐡𝐚𝐭’𝐬 𝐲𝐨𝐮𝐫 𝐮𝐥𝐭𝐢𝐦𝐚𝐭𝐞 𝐠𝐨𝐚𝐥?
Firstly, it’s important to revisit your investment goals. Is it to grow wealth over the medium to long term? Or are you more concerned with preserving your capital, with less growth? Your objective also needs to take account of your risk profile. How would you feel if, for example, the value of your portfolio dropped by 20%? Would it lead to you dumping volatile investments such as shares, or would you see it as an opportunity to pick up some quality shares at a discount?
With your risk tolerance and objectives clarified, it’s time to address your asset allocation. This is the process of deciding what proportion of your portfolio will be allocated to each of the major asset classes, which are: cash, fixed interest, property, and shares.
Asset allocation is the engine room of your portfolio. The amount that you apportion to the major asset classes has the biggest effect on your portfolio performance. It has a greater bearing on your returns than individual asset selection.
Asset allocation is also your key risk management tool as it determines the level of diversification across asset classes whose values may move reasonably independently of each other. The more you allocate to shares and property the greater the volatility, and therefore the risk. However, in this context, Risk isn’t always a bad thing. A higher risk portfolio may at times fall more in value than a lower risk portfolio, but over the long term it is also more likely to generate higher returns, and therefore outpace inflation.
𝐖𝐡𝐚𝐭 𝐜𝐚𝐧 𝐰𝐞 𝐝𝐨 𝐢𝐧 𝐚 𝐝𝐫𝐨𝐩?
If your investment goal and risk tolerance haven’t changed, rebalancing your portfolio (i.e. bringing the asset allocation back to its ideal position) may help to position your portfolio for the next upswing in investment markets.
𝐖𝐚𝐢𝐭𝐢𝐧𝐠𝐨𝐮𝐭𝐭𝐡𝐞𝐬𝐭𝐨𝐫𝐦𝐬
While positioning can help with portfolio risk management, many investors opt to wait out any storms. Why? Because of all the ups and downs, bull markets and bear markets, bubbles and crashes, major share markets have delivered solid long-term growth. 𝐈𝐧𝐟𝐚𝐜𝐭, 𝐢𝐭 𝐡𝐚𝐬 𝐛𝐞𝐞𝐧 𝐜𝐥𝐚𝐢𝐦𝐞𝐝 𝐭𝐡𝐚𝐭 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫𝐬 𝐡𝐚𝐯𝐞 𝐥𝐨𝐬𝐭 𝐦𝐨𝐫𝐞 𝐦𝐨𝐧𝐞𝐲 𝐭𝐫𝐲𝐢𝐧𝐠 𝐭𝐨 𝐚𝐧𝐭𝐢𝐜𝐢𝐩𝐚𝐭𝐞 𝐜𝐨𝐫𝐫𝐞𝐜𝐭𝐢𝐨𝐧𝐬 𝐭𝐡𝐚𝐧 𝐭𝐡𝐞𝐲 𝐰𝐨𝐮𝐥𝐝 𝐡𝐚𝐯𝐞 𝐥𝐨𝐬𝐭 𝐢𝐧 𝐫𝐢𝐝𝐢𝐧𝐠 𝐨𝐮𝐭 𝐚𝐜𝐭𝐮𝐚𝐥 𝐜𝐨𝐫𝐫𝐞𝐜𝐭𝐢𝐨𝐧𝐬.
𝐀 𝐝𝐞𝐭𝐚𝐜𝐡𝐞𝐝 𝐯𝐢𝐞𝐰
Concerned about the financial outlook and your portfolio’s current position? Your financial planner can provide an assessment of your portfolio, help you identify your objectives and understand your risk tolerance, and recommend investments to help you weather the turbulent times.