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How to build a resilient long-term portfolio

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For many investors, developing an investment strategy, implementing it and then sticking to it can be a challenging exercise.

It’s easy to see why. We live in a world where the finance industry and media bombard us with opinions about the “latest insights” and what we should buy and sell. New products are launched each day and the wonders of digital technology make trading easy and tempting.

The consequence is that investors tend to chop and change their strategies too often, especially when the media over-hypes market falls with panicky headlines. A National Seniors Australia Report in 2018 called ‘Once Bitten, Twice Shy’ found that 23% of retirees cannot tolerate a loss on their retirement savings in any 12-month period, which causes them to sell at the worst time when the market has one of its regular and normal corrections.

A better strategy than jumping in and out of markets is to select a portfolio that suits you based on a few simple principles: risk appetite, diversification, cost management and a long-term focus.

An estimated 90% of the return from a portfolio comes from the mix of asset classes, not the share selection. Even if someone has a talent for picking shares, it matters little for the overall portfolio if the asset allocation between cash, property, bonds, domestic and global shares and other alternatives is inappropriate.
 

1. Assess your appetite for investment risk

A test of your risk appetite is how well you will sleep at night if your portfolio falls in value. The Australian stock market on average has a 10% fall once every two years, and there have been three falls of over 50% in the last 50 years. Your risk capacity may vary according to:

  • Your investment horizon
  • Your age and stage of life
  • Your knowledge about investing.

 

2. Select an asset allocation that matches your risk appetite

A broadly-diversified portfolio using a variety of asset classes is a good investment solution for the majority of people. Consider the three portfolios below. Choose a more conservative mix if you are risk averse or older and worry about the value of your investments falling.

If you’re under 50, a more aggressive portfolio may be suitable since you have time to invest more and better capacity to ride out the inevitable share market volatility. Perhaps take some financial advice to assist in assessing your risk profile, then leave your money there and don’t be tempted to swap styles.

These portfolios change the allocation from ‘growth’ to ‘income’ assets depending on risk appetite. The distinction (growth v income) depends on where most of return expected.
 

Example asset allocations at various risk levels

 

Conservative

Balanced

Aggressive

 

 

 

 

Risk horizon

2 years

5 years

8 years

 

 

 

 

Australian shares

6%

20%

35%

Global shares

6%

20%

35%

Listed property

3%

5%

5%

Australian bonds

30%

20%

10%

Global bonds

20%

10%

5%

‘Alternatives’

5%

5%

5%

Cash

30%

20%

5%

TOTAL

100%

100%

100%

 

 

 

 

Growth Assets

20%

50%

80%

Income Assets

80%

50%

20%

 

 

 

 

 

3. Manage your costs

While you cannot control the market, you have more influence over what costs you pay. Not all of these will apply to every investor, but the four major costs to watch are:

  • Brokerage commissions for online trading services
  • Investment management fees
  • Administration fees such as the cost of a platform
  • Financial advice fees.

One way to reduce investment management costs is to invest in index funds, but this removes the possibility of outperformance from selecting a talented manager. Platform fees might be reduced by using securities listed on the ASX, and with $40 billion in Exchange-Traded Funds (ETFs) and $40 billion in Listed Investment Companies (LICs) and Trusts (LITs), there are now plenty to choose from to gain the required exposure, as shown below.
 

Assembling a portfolio using listed securities

A complete list of investment products on the ASX is here. It includes hundreds of ETFs, LICs, LITs, A-REITs, infrastructure funds, unlisted funds on the mFund service, and alternatives such as currency, infrastructure, gold and absolute return funds.

Exposure to the seven asset classes identified in the table above can be achieved in many combinations, and the following are among the more popular (with their ASX code):
 

Cash

  • AAA: BetaShares Australian High Interest Cash ETF
  • MONY: UBS IQ Cash ETF
  • BILL: iShares Core Cash ETF
     

Australian shares

  • A200: BetaShares Australia 200 ETF
  • STW: SPDR 200 Fund ETF
  • VAS: Vanguard Australian Shares ETF
  • AFI: Australian Foundation Investment (Active)
     

Global shares

  • MGG: Magellan Global Trust (Active)
  • PMC: Platinum Capital (Active)
  • IVV: iShares S&P500 ETF
  • VGAD: Vanguard International Shares (Hedged) ETF
     

Australian listed property

  • APF01: APN A-REIT mFund (Active)
  • VAP: Vanguard Australian Property Securities Index ETF
  • SLF: SPDR S&P/ASX200 Listed Property Fund ETF
  • MVA: VanEck Vectors Australian Property ETF
  • Plus an enormous range of A-REITs such as WFD: Westfield, SGP: Stockland, MGR:Mirvac and CQR: Charter Hall.
     

Australian bonds

  • VAF: Vanguard Australian Fixed Interest ETF
  • BNDS: BetaShares Legg Mason Australian Bond Fund (Active)
  • FLOT: VanEck Vectors Australian Floating Rate ETF
  • QPON: BetaShares Australian Bank Senior Floating Rate Bond ETF
     

Global bonds

  • VBND: Vanguard Global Aggregate Bond Index (Hedged) ETF
  • IHCB: iShares Core Global Corporate Bond ETF
  • NBI: Neuberger Berman Global Corporate Bond Trust (Active)
     

‘Alternatives’

  • HBRD: BetaShares Active Hybrid Fund (Active)
  • ALI: Argo Global Listed Infrastructure (Active)
  • TOP: Thorney Opportunities Limited (Active)
  • GLIN: AMP Global Infrastructure (Active)
  • There are also infrastructure stocks such as SYD: Sydney Airport, TCL: Transurban Group and SKI: Spark Infrastructure Group which can be put in the alternatives bucket.
     

An illustrative low cost, balanced portfolio using listed securities

Among a myriad of choices too numerous to list, a sample portfolio based on the above might look like the following table, with the management expense ratio (MER) included. The example seeks to minimise fees, but this approach is not a recommendation. More important is the net return after fees, and if an investor likes an active fund or manager, and believes they can outperform and cover their higher fees, it might be a better choice.
 

Asset Class

ASX code

Balanced Allocation

MER

 

 

 

 

Australian shares

A200

20%

0.07%

Global shares

IVV

20%

0.07%

Listed property

VAP

5%

0.25%

Australian bonds

BOND

20%

0.24%

Global bonds

VBND

10%

0.20%

‘Alternatives’

Mix of HBRD, GLIN

5%

0.75%

Cash

AAA

20%

0.18%

TOTAL

 

100%

0.18%

 

This is a balanced portfolio with an annual MER less than 0.2% (20 basis points) plus the cost of brokerage but with no separate platform fee. Your broker may provide useful tools to assist you with record keeping and tax reporting or you could seek an external portfolio tracking solution.

This illustrative portfolio focuses only on cost, but you could consider a ‘core-satellite’ approach, where the above cost-effective, diversified funds form the ‘core’ of the portfolio while smaller, ‘satellite’ positions can be taken in individual shares or active managers that you have a high degree of conviction in.

4. Think long term and turn down the noise

Investing should be part of a multi-decade plan. Turn down the volume on the daily market noise and resist the temptation to chop and change your strategy on a whim just because you saw something in the media.  That’s not to say you should simply disconnect from financial news. Rather, find and follow sources of information and managers that provide quality information while emphasising a long-term focus.

After all, it’s the high-level asset allocation that will mainly drive your performance and volatility, and if you have the time, interest and knowledge, then finding individual shares and good active managers can provide a further tailwind to your returns.     

 

Graham Hand is Managing Editor of the Cuffelinks Newsletter. A free subscription for nabtrade clients is available here. This article is general information and does not consider the circumstances of any investor.

 

Graham Hand is Managing Editor of Cuffelinks. This information has been provided by Cuffelinks Pty Ltd (ACN 161 167 451) for WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities, we), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances. Any advice and information in this publication is of a general nature only. Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of an individual’s liabilities, obligations or claim entitlements that arises, or could arise, under taxation law, and we recommend that you consult a registered tax agent. WealthHub Securities Ltd. is not a registered tax agent.