More and more these days, my clients are expressing their concern about just how volatile current investments are. Here’s a line I’ve heard quite a bit in recent weeks:
“David, I’ve heard about how volatile these investment markets are.
What should I be doing?”
It’s only natural for those who are planning for their retirement and thinking about their superannuation and other investments, to be concerned. In my books, it’s important to be asking these questions now.
My answer always comes back this: strategic asset allocation.
There are a number of main asset classes we hear about often, including cash, fixed interest, shares (or equities), property and alternatives. These assets are then further divided into Australian and International sectors. Confused?
If you are, that’s what I’m here for. Sure, I can explain the ins and outs of each of the mentioned asset classes above but until you understand why strategic asset allocation is so important, you’re unlikely to see and understand why it really matters.
Explained simply, when you spread and diversify your investments across a number of asset classes, you’re reducing the risks involved in relation to market volatility while smoothing out your returns over a period of time.
How many times have you heard about the poor bloke who lost all of his spare money in shares? Or that property investment that ended up costing someone money because it never quite lived up to its potential as a rental property?
In my line of work, I hear about such scenarios often and it all comes back to people failing to future proof themselves through strategic asset allocation. So how does it work?
It often begins with a process known as diversification, which sees people investing across different asset classes – for instance, they’ll buy shares while also making cash investments. However, a crucial factor here is holding a spread of investments within an asset class spread across a wide range of countries, industries and companies.
While no portfolio is ever protected from negative returns and losses, this strategy does reduce the potential for poorly performing asset classes to have a crippling impact on someone’s finances.
Of course, everyone’s unique case is different, which is where your financial planner should be working alongside you to identify and maximise the benefits available to you.
Strategic asset allocation isn’t something anyone should enter into lightly. A number of factors should be considered and when you’re dealing with things such as superannuation, investments and your future, it pays to do your homework.
If you’re keen to learn more about future-proofing you and your family financially.