It’s no secret that the world of investing can be full of confusing jargon and terminology. It’s not meant to be baffling, but if you’re new to investing, it can definitely feel that way.
So, let’s start demystifying things by looking at one of the most common terms you’re likely to come across, whether you’re managing your own investments or investing through your super – namely, ‘asset allocation’.
What is asset allocation?
Asset allocation is a fancy term that simply means choosing the types of things you invest in, such as cash, shares, fixed income and bonds, property, commodities etc.
At 2020 study found that in Australia, an estimated 9 million people or more have investments (outside of super and their home), and over 4.5 million had a share portfolio.
Many of these people will also have a term deposit, an investment property, or even bonds. These are all asset allocations, but they’re not necessarily... strategic.
What is strategic asset allocation?
Strategic asset allocation takes investing one step further by looking at how you choose your assets, based on things such as your:
- Age
- Risk preferences
- Investment timeframe
- Goals, and
- Investment amount.
For example, the portfolio of a 30 y.o. might be 80% shares, whereas their parents’ might only be 55%.
Because strategic asset allocation is usually a focus of long-term investment (as opposed to the more tactical allocation of short-term investing), it will also generally involve diversification as well – from owning different types of assets to having variation within each asset. For example, in a share portfolio, there may be a mix of Australian and global stocks across different industries, and different companies.
What is a good asset allocation?
As mentioned earlier, the best asset allocation for you will depend a lot on your age and how long you want to invest.
For instance, in the past, when estimating the proportion of shares to own, advisors would often use the formula: 100 minus your age. For a 40-year-old, that would mean 60% shares and 40% conservative assets such as bonds.
In recent years though, that strategy proved to be a tad unreliable, and there’s been a shift towards greater diversity – especially with interest in ETFs taking off, given that they offer in-built diversification, even across asset types (you can actually buy ETFs based on property, commodities and even bonds).
The rule of thumb still exists though: if you’re younger and/or your investment timeframe is longer than five years or so, you can probably afford to take on greater risk by upping your investment in shares and other volatile (but not too volatile) assets depending on your personal circumstances (which are different for everybody).
If you’re nearing retirement, you’re not that keen on risk, or you only want to put money aside for the short-term, you may be safer leaning towards more conservative investments for the main part of your portfolio.
What is asset allocation in super?
It’s not just direct investment portfolios that are influenced by asset allocation. Investment through your super fund can also involve strategically choosing your assets. Again, this will be closely related to how old you are (how many years you are from retirement) and your risk profile.
That’s because ‘growth’ strategies, which are weighted towards more volatile assets, such as growth stocks, may produce better returns in the long run, but can also suffer short-term ups and downs.
Fortunately, time usually balances these out, so if you’re in your 20s or 30s, it’s probably not an issue. But if you’re nearing retirement, then it could cause you headaches, and therefore, an allocation strategy that leans more towards safer, conservative, slower-growth-lower-risk assets might be a more stress-free option.
Ready-made asset allocations
If you’re still not 100 per cent sure about the right asset allocations to go for, you can always leave the hard work up to the experts.
For instance, if you want to invest directly, rather than through your super fund, Spaceship offers three types of managed funds that offer both diversity and strategy – from tech-focused industries, to earth-friendly companies and more blue-chip, conservative stocks.
Likewise, many super fund options give you the choice of funds that offer a professionally allocated mix of Australian shares, international shares, property, fixed interest and cash.
So, whether you’re just starting out in the world of investing, getting ready to beef up your portfolio, or you have retirement in your sights, take a look at your asset allocations, and make sure they’re right for your age, investing timeframe, risk preference and overall goals.
